John McKenzie, CEO of TMX Group, speaks during the Piper Sandler Global Exchange and FinTech Conference in New York City, on June 8, 2023.BRENDAN MCDERMID/Reuters
Canadians who invest in Canadian companies should be exempt from the higher capital-gains-tax inclusion rate set to take effect June 25, according to a proposal Canada’s largest stock exchange operator has submitted to the federal government.
John McKenzie, chief executive of the TMX Group Ltd. X-T – which owns the Toronto Stock Exchange and the TSX Venture Exchange – told The Globe and Mail in an exclusive interview that he personally urged Finance Minister Chrystia Freeland to make that change. But no such exemption was included in implementing legislation that was passed by the House of Commons earlier this week, which Mr. McKenzie said was “highly disappointing.”
“The legislation this week actually reflected no input from anybody,” he said. “It does make me wonder if there was a consultation at all.”
Mr. McKenzie added that Canada had been in “an investment soft spot and a productivity soft spot” even before the tax regime changes.
“If you look at capital-raising in Canada we are in one of the lower points that we have been in for a long time,” he said. “So if you wanted to pick a terrible time to do this, good choice.”
TMX proposed that Canadian investments in Canadian companies should be eligible for either an exemption from or a reduction in the amount of capital-gains tax they would have to pay on those holdings. The process could follow existing rules for eligible dividends, Mr. McKenzie said, where issuing corporations must meet certain criteria in order to qualify as Canadian.
“We wanted to remind the government that not all income is equal,” he said. “There is this tax view that a dollar is a dollar, but that actually ignores the fact that when you do a risk-based investment there is a different risk profile.”
TMX has spent years urging the government to address tax issues it believes harm Canadian productivity and hamper economic growth. Having the budget include a line promising to “modernize and improve the Scientific Research and Experimental Development (SR&ED) tax incentives” – which are currently not available to public companies – represented a victory for the company’s efforts that Mr. McKenzie is hoping to replicate with his latest proposal.
“If they are investing outside in foreign companies then go ahead, make the change, but in terms of incenting investment in our Canadian companies and job creators and innovators in Canada, why would we disincent that?” Mr. McKenzie said. “Then if you are a retail investor and you could put your money into Amazon or Shopify, you would get a better tax rate if you put your money into a Canadian company instead of a U.S. one.”
Mr. McKenzie said he did not push Ms. Freeland hard on the proposal “because I also want to build a relationship with her for the long term” but he added the higher inclusion rate was the latest in a series of tax changes that undermine investor confidence. Out of all the other changes the Trudeau government has made over the years – including share buyback taxes, changes on employee stock option programs and new taxes on financial institutions – Mr. McKenzie said “this was the worst one, because this one goes directly at the investing activity.”
His comments build on his initial response last month when TMX reported its first-quarter results. At the time, Mr. McKenzie said the change essentially amounts to a 33-per-cent tax increase on investing activity and called on Ottawa to find ways of mitigating those additional costs.
In addition to the proposed exemption for investments that stay in Canada, Mr. McKenzie said another potential offset would be an expansion of the existing flow-through-share tax credit for mining companies to other sectors.
Currently, the 15-per-cent mineral-exploration credit allows resource companies to transfer tax deductions associated with their exploration work to their shareholders. That in turn allows shareholders to offset their tax burden from elsewhere in their portfolio. The credit was recently extended for one year through March, 2025, which Mr. McKenzie said is not long enough to be effective.
“It is hard to make a long-term investment, expecting it to be there, if it is only being extended by one year at a time,” he said.
The response from Ms. Freeland and her team to Mr. McKenzie’s proposals, he said, can be paraphrased as “interesting idea, tell us more.”
“She wanted me to understand that she cared about the marketplace. I got the genuine appreciation, but I think she is in a very difficult position.”
The tax appears to have been designed to create a short-term windfall in the budget, Mr. McKenzie said, “because by announcing a fixed date, you are creating a lot of tax-selling activity and it has been noted that a third of all the money is coming this year.”
It also felt like the measure was “rushed into the budget,” he said, given the lack of detail and clarity when it was initially disclosed in April. “I don’t think they were ready.”
“And we also have a government that is still running a $40-billion deficit,” Mr. McKenzie said. “So a reasonable investor asks, okay, what is the next tax change that is coming?”