John McKenzie, CEO of TMX Group, pictured during the Piper Sandler Global Exchange and FinTech Conference in New York City in June 2023. He calls the timing of the capital gains tax changes this year particularly concerning.BRENDAN MCDERMID/Reuters
Canada’s largest stock exchange operator is urging the federal government to mitigate the risk of a higher capital gains tax inclusion rate before the increase takes effect next month.
John McKenzie, chief executive of the TMX Group Ltd. – which owns the Toronto Stock Exchange and the TSX Venture Exchange – said Friday the change essentially amounts to a 33-per-cent tax increase on investing activity. Speaking on a conference call to discuss the company’s first-quarter results, Mr. McKenzie said “this increase will add another disincentive to investing in Canada.”
Because the Liberal government separated the capital gains tax measure that was unveiled in the April 16 budget from the implementation bill tabled in Parliament earlier this week, Mr. McKenzie said in an interview that there is still time for Ottawa “to potentially come up with a better solution that is more tailored to what they are trying to achieve.”
“When we are talking about investing, particularly in venture-sized companies, they don’t pay dividends, a lot of them are preincome so it is a different risk profile that shouldn’t be thought of in the same lens as selling a 50-year-old cottage,” he said.
In the late 1980s, when the Progressive Conservative government of Brian Mulroney also raised the capital gains inclusion rate – to an all-time high of 75 per cent – Mr. McKenzie said the impact of that on Canada’s capital markets was offset significantly by other tax policy changes. In fact, the Mulroney government implemented a broad reform of taxation rules that included cuts to the corporate tax rate and various exemptions for capital gains alongside the higher inclusion rate.
“There was a balancing element there to create another incentive for investing while they were making that change to the inclusion rate,” Mr. McKenzie said. “If the government was open, there are other policy ideas that we would put on the table.”
His main suggestion is an expansion of the flow-through share tax credit 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.
“That would be really impactful for investing in small-cap companies because a lot of them are preprofitability so if they can pass their losses through the investors, that actually derisks that investments so the investor can use that loss to offset other gains without selling the company,” Mr. McKenzie said.
“But if it is only extended one year at a time you can’t create long-term certainty from it, so our approach is why wouldn’t you want that everywhere? We are going to recommend that as a policy alternative.”
Ottawa is planning to increase the taxable portion of capital gains to two-thirds from 50 per cent for corporations and trusts, with the same increase applying to individual investors on any capital gains above $250,000 a year, as of June 25. That timing, Mr. McKenzie said, is particularly concerning.
“We are two years into an extended trough in financing activity,” he said. “This is a change coming in when you already have investment confidence low.”
Capital formation revenue at TMX fell by 5 per cent in its first quarter, compared with the same period in 2023, the company said, reflecting a decline in the total number of financing transactions. Equities trading volume also declined by 13 per cent on a year-over-year basis.