Poly(3-hydroxybutyrate-co-3-hydroxyvalerate) (PHBV), commonly known as a biodegradable plastic produced naturally by bacteria, can be a promising alternative for non-biodegradable and petroleum-based polymers. However, the main demerit such as poor thermal stability, inherent brittleness and high production cost greatly limited its applications. Blending with other polymers is an economic and efficient method to balance these disadvantages. Polycaprolactone (PCL), as a biodegradable polyester with a low glass transition temperature of about −60 °C, exhibits super toughness. Blending PHBV with PCL holds promise to improve the toughness and thermal stability of PHBV, obtaining stiffness-toughness balanced biodegradable polymer blends. The blending of these two different polymers, however, normally comes with the problem of poor compatibility. The target of this research was to improve the compatibility of PHBV and PCL via reactive extrusion in the presence of a crosslinker and free radical initiator. With improved compatibility, the toughness of the PHBV increased as compared to that of the pure blends without crosslinker and free radical initiator. The thermal, morphological and mechanical studies showed that improved interfacial compatibility, decreased PCL particle size and uniform PHBV crystals all worked together to improve the toughness of the blend. The prepared biodegradable polymer blend with high crystallinity and improved toughness can be a good candidate for sustainable packaging. Acknowledgements: The Ontario Ministry of Agri-culture, Food and Rural Affairs (OMAFRA)/University of Guelph - Bioeconomy for Industrial Uses Research Program (Project # 030255); the Ontario Research Fund, Research Excellence Program Round-9 (ORF-RE09) from the Ontario Ministry of Economic Development, Job Creation and Trade (Project #053970); and the Natural Sciences and Engineering Research Council (NSERC), Canada Discovery Grants (Project # 400320).