Capital gains tax change draws ire from some Canadian entrepreneurs worried it will worsen brain drain

18 April 2024
Capital gains tax change draws ire from some Canadian entrepreneurs worried it will worsen brain drain

A chorus of Canadian entrepreneurs and investors is blasting the federal government’s budget for expanding a tax on the rich. They say it will lead to brain drain and further degrade Canada’s already poor productivity.

In the 2024 budget unveiled Tuesday, Finance Minister Chrystia Freeland said the government would increase the inclusion rate of the capital gains tax from 50 per cent to 67 per cent for businesses and trusts, generating an estimated $19 billion in new revenue.

Capital gains are the profits that individuals or businesses make from selling an asset — like a stock or a second home. Individuals are subject to the new changes on any assets over $250,000.

The government estimates that the changes would impact 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 an asset’s taxable amount will devastate productivity, investment and entrepreneurship in Canada, and might even compel some of the country’s talent and startups to take their business elsewhere.

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Benjamin Bergen, president of the Council of Canadian 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 … capital gains piece really is the sun, and it’s daylight. So this is really the only thing that innovators can see.”

The CCI has written and is circulating an open letter signed by more than 150 people in the Canadian business community to Trudeau’s 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.

Former finance minister Bill Morneau said his successor’s budget disincentivizes businesses from investing in the country’s innovation sector: “It’s probably very troubling for many investors.”

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Canada’s productivity — a measure that compares economic output to hours worked — has been relatively poor for decades. It underperforms against the OECD average and against several other G7 countries, including the U.S., Germany, U.K. 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 increase the rate had reached emergency 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 workers

The change could have a chilling effect for several reasons, with companies already struggling to access funding in a high interest rate environment, said Bergen.

He questioned whether investors will want to fund Canadian companies if the government’s taxation policies make it difficult for those firms to grow — and whether founders might just pack up.

The expanded inclusion rate “is just one of the other potential concerns that firms are going to have as they’re looking to grow their companies.”

Benjamin Bergen, president of the Council of Canadian Innovators, said the proposed change could have a chilling effect for several reasons, with companies already struggling to access and raise financing in a high interest rate environment. (Submitted by Benjamin Bergen)

He said the rejigged tax is also an affront to high-skilled workers from low-innovation sectors who might have taken the risk of joining a startup for the opportunity, even taking a lower wage on the chance that a firm’s stock options grow in value.

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.

But Lindsay Tedds, an associate economics professor at Carleton University, said the tax change is one of the most misunderstood parts of the federal budget — and that its impact on the country’s talent has been overstated.

“This is not a major innovation-biting tax change treatment,” Tedds said. “In fact, when you talk to real grassroots entrepreneurs that are setting up businesses, tax rates do not come into their decision.”

As for productivity, Tedds said Canadians might see improvements in the long run “to the degree that some of our productivity problems are driven by stresses like housing affordability, access to child care, 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 — like the Canada Entrepreneurs’ Incentive, which reduces the capital gains inclusion rate to 33 per cent on a lifetime maximum of $2 million — while introducing measures they say would dampen investment and innovation.

“They seem to have one foot on the gas, one foot on the brake on the very same file,” said Dan Kelly, president of the Canadian Federation of Independent Business.

A founder may be able to sell their successful company with a lower capital gains treatment than otherwise possible, he said.

“At the same time, though, big chunks of it may be subject to a higher rate of capital gains inclusion.”

Selling a company can fund an individual’s retirement, he said, which is why it’s one of the first things founders consider when they think about capital gains.

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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 a hike to the capital gains tax. Moshe Lander, an economics lecturer at Concordia University, joins host Jeff Douglas to explain.

Dennis Darby, president and CEO of Canadian Manufacturers & Exporters, says he was disappointed by the change — and that it sends the wrong message to Canadian industries like his own.

He wants to see the government to commit to more tax credit proposals like the Canada Carbon Rebate for Small Businesses, which he said would incentivize business owners to stay and help make Canada competitive with the U.S.

“We’ve had a lot of difficulties attracting investment over the years. I don’t think this will make it any better.”

Tech titan says change will only impact richest of the rich

Ali Asaria, the CEO of Transformation Lab and former CEO of Tulip Retail, told CBC News that the proposed change to the capital gains tax is ‘going to really affect the richest of the rich people.’ (Tulip Retail)

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 people,” Asaria, CEO of open source platform Transformer Lab, told CBC News.

“The capital gains exemption is probably the largest tax break that I’ve ever received in my life,” he said. “So I know a lot about what that benefit can look like, but I’ve also always felt like it was probably one of the most unfair parts of the tax code today.”

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While Asaria said Canada needs to continue encouraging talent to take risks and build companies in the country, taxation policies aren’t the most major problem.

“I think that the biggest central issue to the reason 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?'”

Source: cbc

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