Deputy Prime Minister and Minister of Finance Chrystia Freeland speaks about changes to the capital gains tax inclusion rate, during a news conference on Parliament Hill in Ottawa on June 10.Justin Tang/The Canadian Press
Daryl Ching is the founder and owner of Vistance Capital Advisory, which provides accounting, capital raising and financial management services to small and medium-sized companies.
In the April budget, the federal government unveiled a change to the taxable portion of capital gains. For individuals, it increases from 50 per cent to 67 per cent for capital gains in excess of $250,000. For businesses, there was no such threshold. All capital gains were to be taxed at the higher inclusion rate.
To placate business owners at the time, the Finance Department also announced the Canadian Entrepreneurs’ Incentive. There would be an increase to the lifetime capital gains exemption for business owners from $1-million to $1.25-million. Additionally, the department said capital gains from sales of certain businesses would be taxed at a lower 33-per-cent inclusion rate, up to $2-million; the government would phase in the incentive in increments until the year 2034.
Those measures were not enough. The federal government heard the outcry from entrepreneurs and the venture capital community, so it announced changes on Monday.
The Finance Department said ownership requirements will be loosened to allow more small business owners to benefit from the lower inclusion rate of 33 per cent. The department also said it would phase in the limit more quickly, with annual increments of $400,000 so that it reaches $2-million by 2029 instead of 2034.
While this certainly is an improvement over the original rules, it continues to be a disincentive for business owners and investors to remain in Canada. Not much has changed from the original plan. Canada still has one of highest capital-gains tax regimes in the world, on par with Denmark, Chile, France and Finland.
Finance Minister Chrystia Freeland has described the measure as an attempt to lean against structural inequality and raise funds from wealthy individuals. In the budget, she estimated that the change will affect around 40,000 individuals and 307,000 companies.
However, to deem this tax as one on the wealthy is oversimplified, and the impact is much more far-reaching than those numbers suggest. There are 1.19 million small businesses in Canada and a large majority of these business owners plan to sell their business when they retire. These businesses employ more than 60 per cent of the Canadian work force, and account for half of the country’s gross domestic product.
If Ms. Freeland’s intention was truly to raise funds from wealthy individuals, why not consider a wealth tax on families with a net worth of more than a certain amount? Back in 2019, Senator Elizabeth Warren first proposed a 2-per-cent wealth tax in the U.S. on households and trusts with a net worth of more than $50-million. This type of tax truly only affects people who have amassed substantial wealth, and a large portion of the assets are inactive assets such as real estate, vehicles, yachts and art collections, which do not generate the same level of economic activity as a business does.
The capital-gains tax as it stands right now affects individuals planning to start a business, every business owner that plans to exit, and investors who make their profit investing in small businesses. Business owners put a substantial amount of life savings at risk to start a business. Entrepreneurs go through periods of negative cash flow and find themselves not able to pay themselves for months to keep the business going.
Families have broken up over the financial stress. It is because of these personal sacrifices made by entrepreneurs that 12 million Canadians currently have jobs. For the exceedingly small minority of businesses that actually make a successful exit, does it not make sense for these entrepreneurs to reap the rewards from their success?
When you take an inventory of recent events, small businesses have had an incredibly challenging time since the beginning of the COVID pandemic: The government has shut down the Canada Digital Adoption Program, intended to help small businesses upgrade their technology. Interest rates have risen substantially since 2022, as the Bank of Canada sought to rein in inflation that reached as high as 8 per cent two years ago.
The Canadian Entrepreneurs’ Incentive is a step in the right direction, but the federal government continues to impose substantial taxes on a group that invests money into innovation, generates business activity and provides jobs to the Canadian community.
The overall impact of the increase in capital gains will continue to drive entrepreneurs and investors out of this country to more favourable tax jurisdictions. If we drive enough of them away, then our choice for products and services will be subject to the oligopolies in Canada. That certainly is not a world I want to live in.