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“You can’t ignore geopolitical and macroeconomic issues happening in America that may not lend to people (wanting to move) down south,” he said, adding that there are now major initiatives being introduced by the federal government aimed at keeping high-potential companies and talent in Canada.
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Ruffolo said that U.S. venture capitalists (VCs) have historically encouraged Canadian companies to incorporate in Delaware in order to dodge a withholding tax under the Canadian Income Tax Act. But since Canada changed the law in 2010, “the problem was eliminated and the top U.S. VCs today know it doesn’t matter.”
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Canadian companies that incorporate in the U.S. will incur “material downsides” by missing out on Canadian benefits such as the Scientific Research and Experimental Development (SR&ED) tax credit, said Scott Stevenson, cofounder and chief executive of Dialog Enterprises Inc. (Spellbook), which makes artificial intelligence-powered legal software.
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“SR&ED is especially helpful for Canadian deep tech. There are corporate structures that can enable a U.S. entity to open a Canadian subsidiary, but to my understanding this only allows partial access to SR&ED,” he said. “After pitching over 100 investors, no U.S. VC has ever raised being a Canadian entity as a concern. Ten years ago, you would hear about it coming up, but not anymore in my circles.”
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Still, many investors and analysts called YC’s decision unsurprising and one likely driven by practical considerations.
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Only 165 of YC’s 6,204 investments are Canadian, according to Crunchbase Inc. data.
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Charles Plant, a startup adviser, said Canada’s small contribution to YC’s portfolio likely contributed to its decision to axe the country from its list of accepted countries.
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Citing Crunchbase data, he said none of YC’s Canadian investments have gone public, while only 20 have been acquired and 14 have reached Series B financing or beyond.
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YC also works with a large number of companies, so it probably tightened its list of eligible countries to help streamline its legal and financial processes, Patrick Lor, managing partner at Montreal-based venture-capital firm Panache Ventures, said.
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Lor said Canadian startups still fundamentally rely on the U.S. and other international markets as they scale, so the accelerator’s decision will likely prompt Canadian startups to begin looking at their legal structures earlier.
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Another industry person, who declined to be named due to sensitivities around the topic, had a similar take.
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“This is a simple matter of operational efficiency,” he said. “It’s touchy for Canadians right now. But the cost for an accelerator to invest in foreign companies is not negligible. You have legal costs at the time of investment and on an ongoing basis. From the perspective of YC, they are incurring costs for the companies they know aren’t going to be winners, but still have to deal with annual tax and legal implications.”
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The move aligns with YC’s belief that the companies it invests in should stay in San Francisco, the investor said.
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“They’ve been overt about that,” he said.
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YC’s move comes at a time when the Canadian VC market is on a decline. Canadian VC funds raised $2.1 billion from limited partners in 2025, the lowest amount raised since 2016, according to a January report by RBCx, Royal Bank of Canada’s tech banking and innovation arm.
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Canadian companies raised $2.9 billion in venture capital in the first half of 2025, a 26 per cent drop from a year earlier and the lowest level recorded for the period in five years, according to Canadian Venture Capital Association data.
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