What impact will Canada's new capital gains tax hike have?

Canada's recent decision to increase capital gains taxes has sparked backlash from the business community, intensifying concerns about the nation's already fragile investment landscape and productivity issues.

The tax hike, part of the latest federal budget, aims to raise billions of dollars from the taxes to address the housing crisis—a significant factor in growing disaffection among younger voters.

Finance Minister Chrystia Freeland said the government will tax Canadian companies and individual taxpayers with annual gains exceeding $250,000 on two-thirds of their capital gains, an increase from the previous rate of half.

While the policy includes certain exemptions, such as for entrepreneurs and the sale of primary residences, it has not been well-received by businesses.

"It's a bit shocking — we're baffled by their decision to move on this," Kim Furlong, CEO of the Canadian Venture Capital & Private Equity Association, told Bloomberg. "It signals a clear lack of ambition for growth and scaling. I am certain that, if not reversed, this will add dire consequences for the continued growth of this part of the ecosystem in Canada."

The Canadian Manufacturers & Exporters and the Canadian Federation of Independent Business argue that this move could worsen Canada's already lagging investment performance.

The Canadian Federation of Independent Business, which represents 97,000 small and medium-sized enterprises, warned higher taxes could "de-motivate" entrepreneurs from expanding their businesses in a country already facing a productivity emergency.

The policy is being implemented in a challenging fundraising environment with low liquidity and minimal merger activity.

Scotiabank economist Rebekah Young described the tax-and-spend approach as potentially shortsighted and risky, given the current economic climate marked by low productivity and economic drivers.

“The government continues to take a punitive approach to corporate taxation despite waning momentum in profitability and compressed margins against persistent inflationary, and relatedly wage, pressures,” Young said.

John McKenzie, CEO of TMX Group, which operates the Toronto Stock Exchange, criticized the policy on BNN Bloomberg Television.

"It sends a very negative message,” McKenzie said. “Let’s be candid, I think this is a mistake for productivity. When you’re talking about more taxes on that income group, you’re talking about the income group that does the most investing into small and medium Canadian companies."

CMP

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