Canada Plans to Hike Capital Gains Tax: Who Stands to Be Affected?

Last Tuesday, Finance Minister Chrystia Freeland tabled the federal government’s 2024 budget, which included changes to capital gains taxes that have created a frenzy of discussion, worry and anxiety.

The government announced in the budget that it intends to raise the inclusion rate on capital gains taxes from 50% to 66.7% for all gains realized by corporations and trusts, and for capital gains over C$250,000 realized by individuals, effective June 25, 2024.

The federal budget is being met with disdain from Canada's innovation industry, including tech darling Shopify, which called the capital gains measures in the fiscal plan a potential cause of "irreparable harm."

“The potential changes would encourage entrepreneurs to open their businesses elsewhere and push workers in the sector away from Canada as they try to avoid paying more tax when cashing in on stock options,” according to Benjamin Bergen, president of the Council of Canadian Innovators industry group.

"Those tech talents who join startups and scaleups as they’re beginning their journey are provided stock options and other benefits, which are ultimately determined as capital gains in the future," Bergen said. "If taxation and capital gains are so punitive that it doesn't make sense for either someone to stay in the country or choose to leave maybe a more traditional job to go and build a new company, you're depriving the country of the talent that it needs," Bergen added.

Such concern has also caught the attention of the top echelons in the Canadian tech. Several Shopify Inc. executives, including president Harley Finkelstein, posted about the capital gains changes Freeland proposed on X. Hours after the budget’s release, he wrote, “What. Are. We. Doing?!?”

“This is not a wealth tax, it’s a tax on innovation and risk taking” he added on Wednesday.

Canada's capital gains tax hike turning away investments from mineral exploration by reducing incentives, the country's leading stock exchange operator and dealmakers said.

Mining, oil and gas exploration companies listed on the TSX Venture Exchange have raised funds by issuing flow-through shares, at a premium to the trading price, that allow high net-worth buyers to take tax deductions renounced by issuers.

"The increase in the inclusion rate on capital gains has been characterized as 'a tax on the rich,' but it is in fact a tax hike on investing in Canada that will serve as yet another barrier to economic growth," said John McKenzie, CEO of TMX Group, parent of the Toronto Stock Exchange.

Exploration mining companies raise 65% of their funds through flow-through shares on Canadian stock exchanges, said the Prospectors and Developers Association of Canada, a mining lobby group.

"Exploring for resources is venture capital at its riskiest," said Ron Bernbaum, CEO of PearTree Canada, noting that flow-through shares offer a "successful incentive."

Industry lobby groups are hoping that the government will offer an exemption for flow-through share investors. "If not, it means the likely end of more than 70% of all resource exploration in Canada," Bernbaum of PearTree warned.

For example, consider someone who is planning to sell a secondary property they bought many years ago. It’s conceivable that the gain on that property could be far more than $250,000, meaning that if the property is sold any time after June 25, 2024, any gain in excess of $250,000 would now be taxed at the higher rate.

When it comes to rental properties, Dr. Malik Shukayev, associate professor at the University of Alberta’s Economics Department says, it will lower the supply as less people will be looking at buying a second property as an investment. He says it’s still early to determine what the rental market is going to look like. He also says that those who already have a rental property might now be encouraged to sell before the change comes into effect this summer.

Shukayev says the new policy is going to drive inflation and the cost of living further up.

“For example, when taxing something more, the cost of labor increases. So, in this case, it will just increase business taxes,” Shukayev said.“I don’t see any scenario in which it actually lowers inflation. I think it will be the opposite.”

And when it comes to productivity, he says, Canada will be placed in a weak position compared to other countries and that is not good for our economy. “Innovation, which is a driving factors for the economy is going to suffer, putting Canada’s economic development at risk,” Shukayev adds.

Francis Fong, senior economist at TD Bank, also said that capital investment is already low in Canada, and the timing of hiking the capital gains tax could discourage businesses from putting more money into the economy at a time when growth is already stagnant. A lack of business investment can drag down productivity growth and overall quality of living standards in Canada, he explains.

In addition, Former Bank of Canada Governor David Dodge argues, the budget also hurts millennial and Gen Z Canadians, despite the government’s insistence to the contrary, as the debt is slated to climb further.

“The government said that they were going to try to boost the optimism of 20 and 30-year-olds and their ability to participate in the economy, but in fact, by simply raising the amount of debt outstanding...it's these young voters that are going to be saddled with the debt going forward.”

“We have a budget which is very unhelpful for them over the medium term.”

Source: Financial Post, Bloomberg, Yahoo Finance