Achi news desk-
A chorus of Canadian entrepreneurs and investors is blasting the federal government’s budget for tax expansion on the wealthy. They say it will lead to a brain drain and further degrade Canada’s already poor productivity.
In the 2024 budget unveiled on Tuesday, Finance Minister Chrystia Freeland said the government would increase the capital gains tax inclusion rate from 50 per cent to 67 per cent for businesses and trusts, generating an estimated $19 billion in new revenue .
Capital gains are the profit individuals or businesses make from selling an asset – such as stock or a second home. Individuals are subject to the new changes on any profits over $250,000.
The government estimates that the changes would affect 40,000 individuals (or 0.13 per cent of Canadians in any given year) and 307,000 companies in Canada.
However, some members of the business community say that expanding the taxable amount will destroy productivity, investment and entrepreneurship in Canada, and may even force some of the country’s talent and start-ups to take their business to somewhere else.
Finance Minister Chrystia Freeland unveiled the government’s 2024 federal budget, with spending targeted at young voters and a plan to raise capital gains taxes for some of the wealthiest Canadians.
Benjamin Bergen, president of the Canadian Council of Innovators (CCI), said the capital gains tax has overshadowed parts of the federal budget that the business community would otherwise be excited about.
“There were definitely some other stars in the budget that were interesting,” he said. “However, the sun is really the capital gains piece, and it’s daylight. So it’s the only thing that pioneers can really see.”
The CCI has written and is circulating an open letter signed by more than 1,000 people in the Canadian business community to the Trudeau government asking it to scrap the tax change.
Shopify CEO Tobi Lütke and president Harley Finkelstein also weighed in on the proposed hike on X, formerly known as Twitter.
We need to be doing everything we can to make Canada the best place for construction entrepreneurs 🇨🇦
What is proposed in the federal budget will do the complete opposite. Innovators and entrepreneurs will suffer and their success will be punished – this is not a wealth tax,…
—@harleyf
Former finance minister Bill Morneau said his successor’s budget was preventing businesses from investing in the country’s innovation sector: “It’s probably a big worry for a lot of investors.”
Canadian productivity—a measure that compares economic output to hours worked—has been relatively poor for decades. It is underperforms against the OECD average and against a number of other G7 countries, including the US, Germany, the UK and Japan, on the measure.
Bank of Canada senior deputy governor Carolyn Rogers sounded the alarm on Canada’s lagging productivity in a speech last month, saying the country’s need to raise the rate had reached urgent levels, following one of the weakest years for the economy in recent memory.
The government said it was proposing the tax change to make life more affordable for younger generations and fund efforts to boost housing supply — and that it would support productivity growth.
A challenge for investors, founders and employees
The change could have a chilling effect for several reasons, with companies already struggling to get financing in a high interest rate environment, Bergen said.
He questioned whether investors will want to fund Canadian companies if the government’s taxation policies make it difficult for those companies to grow – and whether founders could just pack up.
The extended inclusion rate “is just one of the other potential concerns that companies are going to have as they try to grow their companies.”
He said the revamped tax was also an insult to skilled workers from low-innovation sectors who might have taken the risk of joining a start-up for the opportunity, even taking a lower salary on the off chance that a company’s stock options grow in value.
But Lindsay Tedds, associate professor of economics at the University of Calgary, said the tax change is one of the most misunderstood parts of the federal budget – and its impact on the country’s talent has been overstated.
“This is not a big tax change treatment that bites at innovation,” Tedds said. “In reality, when you talk to real grassroots entrepreneurs who are setting up businesses, tax rates don’t come into their decision.”
In terms of productivity, Tedds said Canadians could see improvements in the long term “to the extent that some of our productivity issues are driven by stress like housing affordability, access to childcare, things like that.”
‘One foot on the gas, one foot on the brake’
Some say the government is sending mixed messages to entrepreneurs by touting tailored tax breaks – such as the Canada Entrepreneur Incentive, which reduces the capital gains inclusion rate to 33 per cent on a lifetime maximum of $2 million – while introducing measures which they say would reduce investment and innovation.
“They seem to have one foot on the gas, one foot on the brake on the very file,” said Dan Kelly, president of the Canadian Federation of Independent Business.
Some business groups worry that new capital gains tax changes could harm economic growth. But according to Small Business Minister Rechie Valdez, that change won’t affect the majority of Canadians – and it’s a move to create fairness.
A founder may be able to sell their successful company with lower capital gains treatment than otherwise possible, he said.
“At the same time, though, large chunks of it may be subject to a higher rate of included capital gains.”
Selling a company can fund an individual’s retirement, he says, which is why it’s one of the first things founders consider when thinking about capital gains.
Mainstreet NS7:03Ottawa is proposing a capital gains tax hike. What does that mean?
Tuesday’s federal budget includes nearly $53 billion in new spending over the next five years with a clear focus on affordability and housing. To help pay for some of that new spending, Ottawa is proposing an increase in the capital gains tax. Moshe Lander, lecturer in economics at Concordia University, joins host Jeff Douglas i
Dennis Darby, president and CEO of Canadian Manufacturers & Exporters, says he’s disappointed by the change — and that it sends the wrong message to Canadian industries like his own.
He wants to see the government commit to more tax credit proposals like Canada’s Small Business Carbon Rebate, which he said would incentivize business owners to stay and help make Canada competitive with the United States.
“We have had a lot of trouble attracting investment over the years. I don’t think this will make it any better.”
Tech Titan says change will only affect the richest of the rich
Toronto tech entrepreneur Ali Asaria will be one of those subject to the expanded capital gains inclusion rate — but he says it’s only fair.
“It’s going to really affect the richest of the rich,” Asaria, CEO of open source platform Transformer Lab and founder of well.ca, told CBC News.
“The capital gains exemption is probably the biggest tax break I’ve ever had in my life,” he said. “So I know a lot about what that benefit can look like, but I’ve also always felt that it’s probably one of the most unfair parts of the tax code today.”
Although Asaria said that Canada needs to continue to encourage talent to venture and build companies in the country, taxation policies are not the biggest problem.
“I think the biggest central issue to why people will leave Canada is bigger issues, like housing,” he said.
“How do we make it easier to live in Canada so that we can all invest in ourselves and invest in our companies? That’s a more important question than, ‘How do we help the top 0.13 per cent of Canadians make more money?'”
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