April 25, 2024
Canadian business groups say the federal government’s proposed changes to capital gains taxes will have a chilling effect on investment in the country, with one industry association saying the policy is “the last thing the Canadian economy needs.”
The federal government’s 2024 budget proposes hiking the tax rate for capital gains for corporations, trusts and individuals from one-half to two-thirds. For individuals, the tax would apply on gains of more than $250,000. The tax would not apply to principal residences and the lifetime exemption rate has been hiked from $1 million to $1.25 million.
“This measure (will have) a chilling effect,” Benjamin Bergen, the president of the Council of Canadian Innovators industry group, said in an interview with Yahoo Finance Canada on Wednesday. The tech industry, including top executives from Shopify, has derided the changes. Many tech sector executives and leaders have signed an open letter to Prime Minister Justin Trudeau and Deputy Prime Minister Chrystia Freeland, calling for the government “to scrap this disastrous tax hike on investment.”
“This policy is discombobulated in terms of the overall goals that policymakers and the business community have stressed that the government should be focusing on, which is growing the economy, supporting domestic firms that are scaling and growing and helping generate revenue, rather than shrinking the pie and dividing it up further and further to pay for social programs,” Bergen said.
“It’s another tool or measure that the government is taking away from our innovators to attract capital, attract talent and build companies.”
The Canadian Manufacturers and Exporters (CME) trade group president Dennis Darby said in a statement that “taxing Canada’s job creators sends the wrong signal, at the wrong time.”
“This is the last thing the Canadian economy needs, especially in light of Canada’s investment and productivity growth woes. Such measures would deter investment at a time when we are striving to boost competitiveness and innovation within the industry and across the economy,” the CME said.
Other groups representing the business industry, including the Canadian Chamber of Commerce and Business Council of Canada, have criticized the policy and said it will put economic growth and productivity out of reach.
“Any big shift in corporate tax rules adds to planning uncertainty and puts a chill in business investment intentions,” the Conference Board of Canada said in a statement on Wednesday.
“At a time when Canada desperately needs to improve its productive capacity, the measure is bound to have negative effects trickling broadly through the economy.”
Canada’s productivity problem ‘an emergency’
The changes in the budget come as Canada’s economy faces a productivity problem. In a speech last month, Bank of Canada deputy governor Carolyn Rogers called the country’s “pressing need” to increase productivity “an emergency.” Governor Tiff Macklem said at an event alongside Federal Reserve chair Jerome Powell on Tuesday that “in Canada, we look at U.S. productivity growth with envy.”
“I think the budget decidedly makes it worse,” CFIB president Dan Kelly of Canada’s productivity challenge, adding that encouraging entrepreneurship and growth appears to be a low priority for the federal government. He expects medium-sized business owners to be most affected by the capital gains tax change.
“When you’re looking to embark on the long and hard road of running your own business, you do so, often because one of the motivations is a potential reward at the end of it … We’re tinkering with that, and making it less attractive and reducing the rewards of a lifetime of hard work. That’s my worry.”
At the same time, Kelly says that the expansion of the lifetime gains exemption is “good news” for small business owners. He also says the proposed Canadian Entrepreneurs’ Incentive, a new policy that would reduce the capital gains tax rate for some small businesses, was “on the surface good” but too narrowly applied as it would not include sectors like the restaurant industry.
“It really is a mixed bag,” Kelly said.
Some say the changes are ‘levelling the playing field’
Despite the pushback from business groups, some economists say the capital gains change will make the tax system more efficient and could actually help productivity.
“We have had a system in Canada that favours capital gains, favours people holding onto assets to get gains, instead of getting dividends or selling assets to invest in a different stock or a different business venture and so on,” said Michael Smart, a tax policy expert and economics professor at the University of Toronto.
“That’s not good for productivity. We should move towards levelling the playing field so that all investors are paying a fair tax rate, given their incomes, at the same tax rate on every form of investment.”
