Canada’s venture capital ecosystem is facing renewed pressure from multiple directions, as a Senate committee, industry groups and tech-sector leaders all point to the same underlying problem: too little domestic capital is reaching the country’s growth-stage companies, pushing promising firms toward foreign buyers and foreign funding.
A report from the Standing Senate Committee on Banking, Commerce and the Economy, following 15 meetings and roughly 24 hours of testimony from more than 35 witnesses, found that small and medium-sized enterprises — which made up 99.7% of employer businesses in Canada as of December 2024 and generated nearly half of private-sector GDP in 2022 — continue to face a persistent financing gap. The committee concluded that Canada’s financial sector, dominated by a small number of large conglomerates, is structured to favour larger, lower-risk, asset-backed transactions, leaving many SMEs unable to access the capital needed for expansion, innovation or succession planning.
The committee warned that this gap has consequences beyond individual businesses: growing reliance on foreign capital has, in some cases, led to the premature sale of promising Canadian companies and the transfer of intellectual property and future economic value outside the country. It called on the federal government to create a centralized SME Office accountable to a single minister, enhance tax competitiveness for SMEs and their investors, and press provinces to reform public and exempt investment markets so they become viable options again for growing companies seeking liquidity.
Industry Voices Push for Tax Changes
That message has been echoed by investors and executives directly. More than 150 of them signed a letter to Finance Minister François-Philippe Champagne, organized by the Canadian Venture Capital and Private Equity Association and the Council of Canadian Innovators, asking Ottawa to adopt a program modelled on the U.S. qualified small business stock incentive, which excludes capital gains on qualifying small business stock from federal tax. The letter also proposes allowing entrepreneurs and investors to defer — rather than eliminate — capital gains tax when proceeds from domestic business sales are reinvested in another Canadian venture, arguing this would encourage successful founders to redeploy capital into the economy rather than withdraw it.
Later-Stage Funding Called a ‘Labyrinth’
At the Nrth technology conference in Toronto, speakers argued institutional investors need to direct more capital toward homegrown companies. Vass Bednar, executive director of the think tank Canadian Shield, criticized pension funds for investing less domestically even as their asset pools grow, and for favouring lower-risk options like government bonds and infrastructure when they do spend in Canada. North Exit Ventures general partner Tal Schwartz said Canada’s tax policy and capital allocation make it difficult for startups to secure the later-stage investment needed to scale while retaining Canadian ownership, calling the funding path for mid-to-late-stage companies “a bit of a labyrinth.” He pointed to Portage, a Toronto-based fintech investment firm, which closed its fourth venture capital fund at about US$600 million earlier that month, calling it a positive example but saying Canada “needs a dozen of those” to support its innovation base.
Key Figures in Canada's Venture Capital Debate
Other participants framed the issue in terms of financial sovereignty. Ali Abou Daya, chief executive of Transactix Financial, cited studies suggesting at least $16 billion leaches out of Canada annually through domestic companies relying on foreign payment technology, and argued that emerging efforts such as tokenized deposits need to be built on sovereign infrastructure. Wealthsimple’s Hanna Zaidi pointed to the company’s involvement in Tetra Trust, a venture exploring a Canadian-dollar stablecoin, alongside partners including Shopify and National Bank.
Government Response and Debate Over Approach
The federal government has sought to respond with its own initiatives, including Prime Minister Mark Carney’s investment summit, which drew large global fund managers and Canadian politicians and produced pledges of investment alongside announced pro-investment tax reforms. Commentary from The Hub, however, raised concerns about what it termed “Carney-nomics,” arguing that closer cooperation between government and capital allocators — citing involvement from Alberta’s AIMCO and other large money managers — risks dampening market dynamism if major investments require ongoing political coordination, drawing a comparison to concerns previously raised about economic integration in the European Union.
Taken together, the recent testimony, letters and public commentary point to broad agreement that Canada’s venture and growth-capital ecosystem remains undersized relative to the ambitions of its SME and startup sectors, even as there is less consensus on whether the solution lies primarily in tax reform, regulatory changes, pension fund behaviour, or a more active government role in directing investment.
This article is for informational purposes only and does not constitute financial, investment, or legal advice. Consult a licensed financial advisor before making investment decisions.
This article references reporting from:
