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A plan to raise taxes on stock options by Canada’s New Democratic Party would hinder growth in the country’s burgeoning technology industry, which relies on share grants to attract talent, entrepreneurs and investors said.

Tom Mulcair’s NDP will tax 100 percent of stock-option benefits, up from the current 50 percent, if it wins power in the Oct. 19 election. The party, with socialist roots, is locked in a tight three-way race with Prime Minister Stephen Harper’s Conservatives and the Liberals, led by Justin Trudeau, who haven’t proposed any changes to the tax.

New Democrats have characterized the current rate as a “loophole” exploited by Canada’s wealthiest chief executive officers. Increasing it would also affect startups, which often pay a lower salary and use stock options to compensate employees for taking a gamble on a new, risky business venture.

“It could be a huge step backward and a huge blow to the ecosystem,” said Andrew D’Souza, a former executive at education tech company Top Hat Monocle Inc. who’s putting together a new financial services startup. If the NDP wins and applies the policy, he said he might have to move his Canadian staff to San Francisco.

Burgeoning Sector

Canada is undergoing a technology renaissance. Employment in the software sector is soaring and big U.S. companies like Amazon and Google are opening offices in Toronto and Vancouver. Entrepreneurs are looking to follow the success of startups like Ottawa-based e-commerce company Shopify Inc., which has soared 45 percent to a market value of C$3.7 billion ($2.8 billion) in Toronto since going public in May.

Higher taxes on stock options could slow that growth down, investors said.

“As an entrepreneur, you’re starting out of the gate with all of the odds against you,” said Chris Arsenault, managing partner of iNovia Capital, a Montreal-based venture capital firm. “You have no cash, you’re trying to attract talent. Being able to offer a stock-options plan to employees is basically the only tool that a startup has.”

Revenue Estimate

The NDP has never formed government nationally but has held a slim lead throughout much of the campaign. The party estimates the tax shift would generate C$500 million in new annual revenue for government, though other parties doubt it would be so much.

Canadian taxation of stock options is typically booked when the option is exercised, with the amount taxed based on the difference between the price paid for the share and its market price when the option is exercised. The latest Finance Canada figures estimate that existing stock option deductions reduced government revenue by C$750 million in 2014 compared with C$430 million five years earlier.

While the NDP’s policy book also favored taxing 100 percent of capital gains as income compared with the current 50 percent, Mulcair -- a former Quebec environment minister and lawyer -- has opted against any changes.

The NDP has said higher stock-option taxes would be ear-marked for anti-poverty measures but has otherwise not detailed its proposal, including whether the existing deferral for options given to employees of Canadian controlled private corporations would be extended. Requests for comment about the impact of the measure on startups were not returned by party officials Wednesday.

‘Sound Byte’

In a speech Tuesday evening, Mulcair referred to the current rules as “tax loopholes on CEOs’ stock options, which help the wealthiest Canadians -- loopholes that I will close and redirect the money, dollar for dollar, to reducing income inequality in this country and eliminating child poverty.”

“It’s a good sound byte when you’re like, ‘Hey we’re taxing big corporates.’ Everybody can get on board with that,” D’Souza said. In practice though, the policy will hurt small companies the most while big, established corporations can find other ways to compensate employees.

D’Souza said he hopes the NDP refines its policy. “As it stands right now it’s pretty disappointing.”