There is a number that explains almost everything about how venture capital works: 20. As in 20 per cent—the carried interest slice that fund managers take from profits above a hurdle rate. That slice is the economic engine of the asset class. Change how it is taxed, and you change who raises funds, where they raise them, and ultimately which founders receive a cheque at the Series A stage.
Ottawa is now considering that shift. As part of a broader review of the capital gains framework following the 2024 federal budget's capital gains amendments, the Department of Finance has opened consultations on investment income treatment, with carried interest squarely in scope. Under current rules, carried interest is taxed as a capital gain, subject to Canada's 50 per cent inclusion rate, though a recent proposal suggests raising this to two-thirds for gains above $250,000. A policy shift that reclassifies carried interest as ordinary income would compress fund manager returns and alter the incentive calculus for raising future funds in Canada.
This is not an abstract tax debate; it is a capital availability problem for BC founders, arriving when the province's growth-stage capital stack is already under stress. The Yaletown Ledger previously reported on BC's Series B desert—the structural gap that stalls promising companies at the $10-million threshold. Carried interest reform that reduces the attractiveness of Canadian-domiciled funds would likely widen that gap.
The math, plainly stated
A fund manager raising a $200-million vehicle generates a 3x return and earns carried interest on profits above the hurdle. Under current capital gains treatment, that carry is taxed at the inclusion rate. If shifted to full income treatment, the effective tax rate on carry would jump by 15 to 20 percentage points, depending on the manager's province. In BC, where the combined top marginal rate exceeds 53 per cent, this difference is significant, potentially making Canadian fund economics uncompetitive compared to those in California.
What the comparables show
Canada is not operating in a vacuum. Both the United Kingdom and Australia modified their carried interest regimes in 2024–25. The UK's reforms, implemented via the 2024 Autumn Budget, raised the capital gains tax rate on carried interest from 28 per cent to 32 per cent, with a further shift toward income treatment scheduled for 2026. Data from the British Private Equity and Venture Capital Association indicated a slowdown in new UK-domiciled fund formations, with some managers opting for Luxembourg or Channel Islands structures.
Australia's 2024 Treasury consultation focused on tightening the conditions under which carry qualifies for concessional treatment. The effect was similar: increased compliance costs and uncertainty, which disproportionately burdened smaller fund managers.
BC's specific exposure
The Canadian Venture Capital and Private Equity Association reported $8.7 billion in venture capital deployed across Canada in 2024. BC's share has historically tracked between 15 and 20 per cent, concentrated in technology, life sciences, and clean energy. This places between $1.3 billion and $1.7 billion in annual provincial deployment at stake.
The CVCA has opposed reclassification, arguing in submissions to the Department of Finance that current treatment aligns manager incentives with long-term capital formation. The association warned that tightening rules would likely drive talent and capital to offshore structures.
What to watch
- The Department of Finance consultation timeline: legislative changes are expected in the fall 2026 fiscal update or the 2027 budget.
- Whether the CVCA's lobbying produces a carve-out for qualifying VC funds—similar to the existing BC Venture Capital Tax Credit—that preserves current treatment for funds meeting specific criteria.
- New fund announcements from BC-based managers: a slowdown in closes or a shift toward offshore structures would signal that the incentive math has shifted.
- LP behaviour from institutional investors like BCI and major pension funds, whose co-investment appetite amplifies the effect of any contraction in fund manager activity.
