June 22, 2024

Saluti Law Medi

Rule it with System

Opinion: Increasing the capital-gains taxes will hurt health care in Canada

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Prime Minister Justin Trudeau, Finance Minister Chrystia Freeland and cabinet ministers before the tabling of the federal budget on Parliament Hill in Ottawa on April 16.Justin Tang/The Canadian Press

Cheryl V. Reicin is a partner and international chair, life sciences, at Mintz LLP, an international law firm. She is an internationally recognized adviser to life-science companies that develop novel therapeutic, medical device and health technologies, and to investors.

Much has been said in response to the 2024 federal budget’s planned changes to capital-gains taxes. Experts and industry professionals have weighed in on how such changes undercount the number of affected people, hurt the middle class, disproportionately affect employees and lower-level executives, and stymie entrepreneurship.

All of that is equally true for the life-science industry. But the negative effects for life science and health care in Canada are even more pronounced.

Canada’s expertise in scientific and medical research is second to none; its universities conduct world-leading research and innovation; and its hospitals are among the best in the world. Canada is just starting to have real economic success in commercializing its life-science innovations and has the opportunity to be a top hub for medical innovation. However, rather than creating a friendly environment to expand the life-science sector, the new capital-gains tax will limit and perhaps reverse growth.

A familiar refrain I hear from my Canadian clients working in the sector is wondering whether they should stay in Canada or move to the United States. Meanwhile, venture capitalists and other life-science investors, who have historically concentrated their investments in Boston, Silicon Valley and San Diego, lament the increasingly prohibitive cost of hiring and retaining scientific talent in those core markets.

This coincides with a time when the oldest baby boomers are approaching their 80s and facing limited treatments for many of the ailments that affect the elderly, such as Alzheimer’s and Parkinson’s. Investors are actively seeking additional core markets for life-science and health-tech companies to address these needs.

The depth of scientific talent in Canada and relative cost advantages make this country’s metropolitan centres attractive and obvious choices for those investors.

And yet it is cities in Texas, such as Austin – where the scientific talent pales in comparison with that of Canadian hubs – that are quickly filling that role because of the state’s favourable tax environment.

Canadian life-science companies are struggling to recruit experienced management personnel, many of whom are located in the U.S. and Europe. These seasoned executives worry that if a company is sold or fails, there simply aren’t enough opportunities in the Canadian ecosystem to secure a comparable position in the same city, forcing their often-young families to relocate again. Unless we create critical mass, the Canadian life-science hubs are likely to flounder.

The proposed capital-gains tax increases will render Canadian cities even less competitive than locales south of the border or abroad. For private startups and public companies alike, stock options are used to attract and retain top-tier talent, many of whom will agree to forgo substantially larger salaries for a possible upside years down the road.

In the life-science sector especially, compensation practices rely heavily on equity compensation programs as young, innovative companies tend to be cash-poor. As a direct result of the planned increase in capital-gains taxes, companies will have no choice but to offset the lost value by offering more stock options and other non-cash incentives to remain competitive. This in turn will dilute the holdings of investors who will be increasingly deterred from investing in Canada.

We need those investors and that talent in Canada, and we need them to stay, not only for the life-science industry but for the health care system over all. Canada’s physicians need to be exposed to and working on cutting-edge solutions developed and funded by such entrepreneurs and investors as well as have access to clinical trials in order to provide best-in-class care. Patients also need access to these innovations and clinical trials.

Moreover, when Canada is a significant source of innovation for the industry, it will have the leverage and heft to ensure the local manufacture and supply of therapies, devices and diagnostics. Let us not forget that just a few years ago we were all trapped five months longer at home than our American neighbours because we didn’t have local manufacturing of COVID-19 vaccines.

We need the investors and talent to come and stay in Canada to help discover and develop novel, effective therapies against chronic and seemingly incurable diseases in order to support our health care system. To ensure that local life-science companies are able to grow in Canada and remain, we need to foster a friendly and inviting environment for talented executives and smart money. The last thing we need to do is scare them away.