Last week’s federal throne speech mentioned Canada’s immigration system—specifically, how Canada will compete for global talent—and that Canada “has an opportunity as we recover to become the world’s top destination for talent.” Unfortunately, some of the Trudeau government’s plans will actually make this worthy goal more difficult to achieve.
Canada accepts about 300,000 immigrants (on average) per year including highly educated individuals with training in science and engineering. This specific group of immigrants make large contributions to productivity growth by promoting innovation and entrepreneurship.
Recent research shows that Canada, compared to other countries, does a relievedly good job attracting immigrants with a college, undergraduate or masters degrees. However, we are less successful at attracting the most highly educated immigrants, often trailing the United States, for example, in attracting immigrants with PhD-level education. Again, some Trudeau government proposals in last week’s throne speech could make Canada even less competitive in attracting “star” scientists and engineers from elsewhere.
In particular, the government pledged to eliminate the tax deductibility of stock options. Companies often use stock options to attract and retain talented employees, especially those working in entrepreneurial and innovative activities where commercial success is not guaranteed at the outset of business activity. So linking financial rewards to successful outcomes (like with stock options) is a more practical way to compensate talent compared to salaries alone.
Furthermore, given Canada’s current tax system, replacing capital gains from stock options with salaries will likely mean that talented innovators and entrepreneurs will be taxed more heavily for their successful efforts (since a portion of capital gains is exempt from the personal income tax while salaries are not exempt). In the throne speech, the government also pledged to find other new ways to tax wealth, although the details are not yet known.
This tax penalty will exacerbate Canada’s tax disadvantage relative to U.S. states. Consider that Canadians at the C$150,000 income level face higher combined federal and provincial marginal tax rates than Americans in every U.S. state (the rate is double in some cases).
While not the sole factor, after-tax income is a critical factor for star scientists and engineers to consider when deciding where to work. Therefore, tax changes that reduce the expected financial rewards from successful scientific and entrepreneurial activities will discourage the most talented individuals from moving to Canada. And limiting stock option deductibility is a particularly damaging indirect tax, since this type of compensation is well-suited to reward innovation and entrepreneurship.
So what can Ottawa do to make Canada more attractive to top talent?
For starters, the government could revise the immigration point system to give greater weight for advanced degrees in science, technology, engineering and math (also known as STEM). The point system could also recognize the quality of the degrees obtained by applicants.
Finetuning the selection criteria should help attract global talent, at the margin. However, if Canada is serious about becoming the world’s top destination for talent, as noted in the throne speech, policymakers must establish an environment that provides prospective newcomers with economic incentives to choose Canada.
Simply put, changing the tax structure to penalize the use of stock options, and imposing other tax measures that penalize the accumulation of wealth, are sure ways to make Canada a less attractive location for top talent.