Canada’s new child care program is its own worst enemy. Only about 30 percent of Canadian children have access to one of the $10/day spaces, amongst other problems. And as an access to information request has now revealed, the expansive bureaucracy overseeing the program can also result in less access to child care, not more. That’s what happened when Lanark County, just outside Ottawa, terminated its contract with home child care agency Natural Connections, leaving some 300 families scrambling for care just before the start of the school year. When this happened, we were curious as to why. Was quality of care at stake? Why curtail access just as the program was supposed to be ramping up?

The audit report obtained by freedom of information reveals technocratic reasons for the termination of the contract. If you side with Lanark, then the private agency whose contract they terminated misled parents for the sake of paying their caregivers more as well as receiving more federal money themselves. Looking at the issue from a different angle, it’s possible this may have been either necessary for their survival or inadvertent.

The cancelling of the contract with Natural Connections is something of a case study in Canada’s mismanagement of the new system. Instead of allowing parents to choose and pay for the care arrangement that works best for them, governments intervene to pick winners and losers amidst care providers and agencies doing equal jobs. Furthermore, it is a system so complex that many daycares and agencies are struggling simply to adhere to the rules whilst staying afloat.

Rewind to 2021, when the federal government introduced the Canada-Wide Early Learning and Child Care program (CWELCC), budgeting $30 billion dollars over five years. Each province and territory signed a five-year agreement, consenting to specific terms in order to receive funding. One of these was to force licensed daycares participating in the program to freeze their fees. Taxpayer funding would replace a progressively larger share of parent fees until parents were paying an average of $10 per day for licensed care.

The federal government transfers money to the provinces, who are then responsible for transferring the money to licensed daycares and home child care agencies. In Ontario, there is another layer of bureaucracy involved, as the province transfers money to each of Ontario’s 47 municipalities, like Lanark County. Municipalities are then responsible for administering these funds and function as gatekeepers. They may determine which of the many eligible families actually get a licensed child care space and, in some instances, where a child will attend.

Enter the situation in Lanark. What did Natural Connections do, precisely, that warranted them being pushed out of the program? Natural Connections is a licensed home child care agency. Such agencies contract with local home-based providers, who look after smaller numbers of children. Such children are classified as “private,” meaning their families have made arrangements directly with the home-based provider, or as “agency,” meaning their families made arrangements through the agency.

These categories mean little to nothing to parents. But they can mean a lot to government, because in Ontario, a municipality may pay less for a “private” child than for an “agency” child. It is alleged that Natural Connections worked with its home-based providers to convert their “private” children to “agency” status, which increased the dollars Lanark County needed to pay out.

Lanark County alerted the province to this. They also received a complaint from a competing agency with an axe to grind—the competing agency had lost child care providers to Natural Connections. Municipal and provincial bureaucrats connected over the issue “several times.” The audit says the province viewed the problem as a “loophole” because “parents have the right to change from Private to Agency.” End of story? No. Start of audit for Natural Connections.

The audit makes clear that the loophole Natural Connections found meant that Lanark County would be paying out more CWELCC funds than they had previously envisioned. They write that this would “negatively impact the funding allocation of other providers.”

What can we draw from this tempest in a government teapot?

Firstly, all levels of government drip with hostility toward private “for-profit” care. The many strings the federal government has attached to the funding, and certainly its expressed preference for public and non-profit service providers, have exacerbated tensions between the public sector bureaucracies administering the funding and the small child care businesses that depend on it.

Lanark perceived the agency to be attempting to increase profits. At the same time, there is plenty of evidence that government knows little about how much child care provision actually costs. Freezing child care fees and then not ensuring that the promised “replacement revenues” keep pace with inflation speaks to this. 

Another point is that just as the agency found a loophole through which its home-based providers could be paid more, the government realized they don’t want to pay the extra money out. The $30 billion the federal government has allocated is simultaneously too much and too little. Too much because some jurisdictions are swimming in a funding infusion they can’t spend quickly enough. Too little because this amount does not begin to address the long-term issues of maintaining a quality system or creating new spaces. Given limited resources and the state of Canada’s economy, governments are not going to be altruistic about funding child care adequately. The result is that the government may choose to withhold funding both now and in the future in ways it shouldn’t.

The reason given to terminate the Natural Connections’ CWELCC contract hinges on parents not being 100 percent aware of the administrative details of how the municipality’s CWELCC implementation process classified their children. Given the confusion surrounding CWELCC, the question is whether it is even reasonable to expect parents to appreciate the technical nature of such a change.

What happened in Lanark is a problem with the structure of the CWELCC itself. There are few, if any, mechanisms available to either daycares or families to hold child care bureaucrats accountable for erroneous or arbitrary decisions, administrative excess, or simple incompetence. Participating in the CWELCC program is extremely complicated for licensed daycares and agencies, making it almost certain that more will be terminated from the program because, whether by accident or intent, they have run afoul of an extremely large and largely unaccountable CWELCC bureaucracy.

Ultimately, it will be parents who wind up paying the price. 

The following is a French-language version of Derrick Hunter’s article, “Slower growth, fewer jobs, a worse economy—the consequences of the capital gains tax shouldn’t be shrugged off,” originally published at The Hub on April 19, 2024. The English-language version is included below.

Dans un article publié à la suite du budget 2024, Trevor Tombe a vigoureusement défendu la décision de Chrystia Freeland d’augmenter les taux d’inclusion des gains en capital pour les entreprises, les fiducies et les particuliers à revenu élevé. Le bon professeur explique avec des calculs mathématiques ce qui arrive lorsqu’une société réalise un gain en capital et transfère ensuite ce gain à ces actionnaires. Son exemple illustrait le concept d’« intégration », qui caractérise le système fiscal canadien depuis des décennies. L’intégration fait référence à l’idée selon laquelle les régimes d’imposition des entreprises et des particuliers ne devraient pas traiter différemment les investissements détenus dans une entreprise et ceux directement détenus par les contribuables. Le même principe s’applique aux dividendes et c’est d’ailleurs la raison d’être du crédit d’impôt pour dividendes. Sans intégration, certaines stratégies d’investissement seraient favorisées par rapport à d’autres. C’est pourquoi il est assez difficile de remettre le principe en question.

C’est lorsque Tombe pousse le principe un peu plus loin que la théorie abstraite entre en contradiction avec la prise d’une décision d’investissement dans le monde réel. Il poursuit son article en s’appuyant sur un vieux sophisme économique qui affirme qu’un « dollar est un dollar » et que l’économie n’est pas impactée différemment si ce dollar est perçu auprès d’un particulier ou d’une entreprise. Autrement dit, le dollar de revenu perçu auprès d’un employé devrait être imposé au même taux que le gain en capital réalisé par l’investisseur, et ce, dans le but de ne pas avantager certains contribuables par rapport à d’autres. Cette affirmation a été répétée à maintes reprises par des universitaires et des salariés dans la foulée du budget 2024.

Cette neutralité de l’imposition est peut-être réelle pour l’Agence du revenu du Canada, mais elle ne l’est certainement pas pour les entrepreneurs qui créent des entreprises ou pour les investisseurs qui les financent.

La firme que je dirige a été l’un des investisseurs en démarrage les plus actifs au cours de la dernière décennie au Canada. Il y a une semaine, nous avons réalisé notre centième investissement dans une entreprise en prédémarrage du secteur de la technologie, en grande majorité au Canada. Nous menons nos affaires avec sérieux et nous avons été récompensés pour nos efforts par de nombreux prix. Nous avons notamment reçu le titre d’investisseur providentiel canadien de l’année en 2019.

Il y a trois raisons principales pour lesquelles le dollar que nous gagnons grâce à nos activités d’investissement n’est pas comparable au dollar gagné par un employé typique. Ces raisons se résument au risque, à la liquidité et à la valeur temporelle de l’argent.

1. Le risque. Nous prenons nos décisions d’investissement en sachant que chaque entreprise dans cette classe d’actifs a 75 à 80 % de chances d’échouer. De très nombreuses études montrent que les investisseurs ne récupèrent pas le capital qu’ils ont investi dans la grande majorité des entreprises en démarrage du secteur de la technologie. Les investissements dans la minorité qui réussit doivent donc être suffisants pour compenser de multiples échecs. Un salarié gagnant un revenu régulier d’emploi ne court aucun risque comparable.
2. La liquidité. Lorsque nous investissons dans une entreprise naissante, nous prévoyons détenir cet investissement pendant sept à dix ans. Au cours de cette longue période, les possibilités de le convertir en liquidités sont très rares; les fonds sont véritablement bloqués jusqu’au moment où une sortie est réalisée, même si nous identifions de meilleures opportunités pour ces liquidités. Le contraste est saisissant avec l’employé dont les efforts seront récompensés par de l’argent liquide toutes les deux semaines.
3. Le temps. Sur une période de détention d’une dizaine d’années, il est très facile de voir comment l’inflation érode la valeur réelle d’un investissement, même lorsque les rendements nominaux peuvent sembler marginalement acceptables. Postulons que l’inflation grimpe en moyenne de 3 % par année pendant ces dix ans. La valeur d’un investissement devra augmenter de presque 75 % pour arriver à suivre le rythme de l’inflation pendant cette période de détention d’une décennie. Dans cet exemple, un investissement de 100 $ qui rapporte 175 $ n’a généré aucun rendement réel, mais l’impôt sur les gains en capital est prélevé sur le rendement nominal (c.-à-d. 75 $). L’investisseur devra alors payer 25 $ d’impôt sur un investissement qui n’a produit aucun rendement réel. En réalité, l’impôt transforme ce gain en perte. Encore une fois, un employé ne se retrouve jamais dans une telle situation, car il est payé toutes les deux semaines pour le travail effectué sans prise de risque.

Pour nous, investir dans des entreprises en démarrage est emballant et gratifiant, mais c’est la recherche pure et simple du profit qui nous motive. Bien qu’il ne s’agisse pas de dons de bienfaisance, les investissements que nous réalisons avec nos partenaires ont pour heureuse conséquence de créer des milliers d’emplois et des centaines de millions de dollars en activité économique tous les ans. La création d’opportunités économiques a toujours dépendu, avant tout, du nombre d’entrepreneurs innovants dans une société et de ceux qui investissent pour les soutenir. Nous devons tous les nouveaux emplois nets aux entreprises en démarrage. C’est la meilleure façon de développer l’économie que l’humanité a inventée, et 13 millions d’emplois du secteur privé au Canada doivent leur existence à ce type d’activité.

Mais demandez-vous pourquoi quelqu’un prendrait les risques associés à un investissement dans une entreprise naissante lorsque cet investisseur est soumis aux taux d’imposition marginaux canadiens les plus élevés, dépassant 50 % dans la plupart des provinces. Le gouvernement réclame la plus grande partie des fruits de vos efforts! Supposons que vous aviez le choix entre un CPG rapportant 5 % d’intérêt par an, sans risque de perdre votre capital, ou d’investir cet argent dans une entreprise en démarrage avec 80 % de chances d’échec. Sachant que l’investissement pourrait peut-être générer plusieurs fois ce capital dans dix ans, mais qu’il sera imposé ensuite au même taux qu’un rendement nominal, vous choisiriez probablement le CPG la plupart du temps. 

Un autre adage économique dit que « si vous voulez moins de quelque chose, taxez-le davantage ». C’est ce qu’ont fait Freeland et cie cette semaine. Le Canada connaît déjà une crise de productivité bien documentée, avec un PIB par habitant en baisse au cours des derniers trimestres. En réduisant la disponibilité des capitaux, le plus récent budget ne fera qu’accélérer cette très mauvaise tendance.

Derrick Hunter est le chef de la direction de Bluesky Equities Ltd. et est administrateur de la fondation Hunter qui finance le Hunter Prize for Public Policy décerné par The Hub.

Slower growth, fewer jobs, a worse economy—the consequences of the capital gains tax shouldn’t be shrugged off

We should be doing all we can to encourage entrepreneurship. This tax increase does the opposite

Trevor Tombe has laid out a vigorous defense of Chrystia Freeland’s Budget 2024 decision to hoist capital gain inclusion rates for corporations, trusts, and high-income individuals. In his essay, the good professor illustrated the mathematics involved when a corporation incurs a capital gain and then passes the proceeds on to its shareholders. The example depicted the concept of “integration,” which has been a hallmark of the Canadian tax system for decades. Integration refers to the idea that the corporate and individual tax systems should be indifferent to whether an investment is held in a corporation or directly by the taxpayer. The same concept applies to dividends; it is the reason why the dividend tax credit exists. Without integration, some investment strategies would be favored over others so conceptually, it is pretty difficult to argue with.

It is when he takes the concept one step further that academic theory collides with real-world investment decision-making. Tombe goes on in his piece to rely on the old economic canard that “a dollar is a dollar” and the economy is indifferent as to whether it is collected from an individual or a corporation. In other words, the income tax dollar collected from an employee should be taxed at the same rate as the capital gain earned by the investor in order to avoid advantaging certain taxpayers over others. This line has been repeated many times by academics and wage-earners in the wake of Budget 2024.

That indifference may well be true for the Canada Revenue Agency, but it is certainly not true for the entrepreneurs who start companies or the investors who finance them.

The company that I lead has been one of Canada’s most active early-stage investors over the past decade. Last week, we made our one-hundredth investment in a seed-stage technology company; the large majority of these are located in Canada. We treat this business seriously and for our efforts, we have been recognized with a number of awards including being named Canada’s Angel Investor of the Year for 2019.

There are three main reasons why the dollar that we earn from our investment activity is not the same as the dollar earned by a typical employee. These boil down to risk, liquidity, and the time value of money.

1. Risk. We make our investment decisions knowing that every individual company in the asset class has a 75 percent to 80 percent chance of failure. Loads of studies show that the large majority of early-stage tech companies fail to return their investment capital. Investments in the minority of companies that succeed have to be sufficient to carry the load of multiple failures. An employee earning regular income in a job bears no equivalent risk.
2. Liquidity. When we invest in a startup, we expect that the holding period will be between seven and ten years.  Over this long period of time, it is very rare to have the opportunity to swap our position for cash; we are truly locked in until the point where an exit is achieved even if we identify better opportunities for the cash.  This contrasts starkly with the employee who will see cash for his or her efforts within two weeks.
3. Time. With a holding period of a decade or so, it is very easy to see how inflation erodes the real value of an investment even when nominal returns may look marginally acceptable. Let’s say inflation averages 3 percent over the ten-year period. At the end of the ten-year holding period, the investment would have to increase in value by nearly 75 percent just to keep pace with inflation. In this illustration, a $100 investment that becomes worth $175 has produced no real return, yet the capital gain tax is levied on the nominal return (ie. $75). The investor owes $25 in tax on an investment that has produced no real return at all; indeed, the tax has actually put him into a loss position. Again, this does not happen to an employee, who is paid every two weeks for labour supplied and bears no such risk.

For us, investing in early-stage companies is exciting and rewarding, but it is purely profit-seeking. While this is not a charitable activity, the investments that we make along with our partners do have the delightful side effect of creating thousands of jobs and hundreds of millions of dollars of annual economic activity. The creation of economic opportunities has always depended first and foremost on the prevalence of creative entrepreneurs and those that invest to support them. All net new jobs come from startups. It’s the best recipe for economic development mankind has ever invented, and 13 million private sector jobs in Canada owe their existence to this sort of activity.

But ask yourself why anybody would ever take on the risks associated with early-stage investing if they were subject to the top marginal Canadian tax rates which exceed 50 percent in most provinces. The government has a larger claim on your efforts than you do! If your choice is between a GIC paying 5 percent per year with no chance of loss or a startup with an 80 percent chance of failure that might produce a multiple of that in ten years and then be subject to the same rate of tax on a nominal return, you probably would take the GIC most of the time. 

Another economic adage is that “if you want less of something, tax it more.” That is what Freeland and company have done this week. Canada is already experiencing a well-documented productivity crisis, with GDP per capita declining over the past several quarters. By reducing capital availability, this latest budget will only accelerate that ugly trend.