Government announced increase in federal budget
More Canadian business associations are sounding the alarm over the federal government's proposal to increase capital gains taxes, warning it will worsen the country's productivity woes.
In its 2024 budget, the government revealed plans to raise the capital gains inclusion rate from one-half to two-thirds for corporations, trusts, and individuals with gains exceeding $250,000 annually. The changes exempt principal residences, and the lifetime capital gains exemption rises from $1 million to $1.25 million.
The tax hike comes as economists flag Canada's sluggish productivity growth as a pressing economic challenge.
"We have a pressing need to increase productivity in Canada – it's an emergency," Bank of Canada deputy governor Carolyn Rogers said.
Dan Kelly, president of the Canadian Federation of Independent Business (CFIB), blasted the capital gains proposal as counterproductive.
"I think the budget decidedly makes [the productivity problem] worse," Kelly said. When you're looking to embark on running your own business, you do so often because of the potential reward at the end. We're tinkering with that, making it less attractive and reducing the rewards of a lifetime of hard work. That's my worry."
Kelly expects medium-sized firms to bear the brunt and predicts some business owners may rethink expansion plans. However, he welcomed the higher lifetime exemption as "good news" for small businesses.
Read more: What impact will Canada's new capital gains tax hike have?
The government's proposed Entrepreneurs' Incentive, lowering capital gains rates for some startups, was "on the surface good" but too narrow, Kelly argued, excluding sectors like restaurants.
"It really is a mixed bag," he said.
On the other side of the debate, some economists argue that the changes could lead to a more efficient tax system and inadvertently boost productivity.
Tax expert Michael Smart of the University of Toronto said the changes could boost productivity by "leveling the playing field" and removing incentives to hoard assets.
"We should move towards all investors paying a fair tax rate on every form of investment," Smart said.
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