Capital gains tax change 'shortsighted' and 'sows division' business groups tell Freeland

Forging ahead with increasing Canada's capital gains inclusion rate "sows division," and is a "shortsighted" way to improve the deficit, business groups are warning Finance Minister Chrystia Freeland.

In a new letter sent to Canada's chief financial steward and deputy prime minister, six of the country's largest industry organizations are sounding off about the concerns they have that the policy change will stifle economic growth and come at the expense of future generations' prosperity.

"Put simply, this measure will limit opportunities for all generations and make Canada a less competitive, and less innovative nation," reads the letter.

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"Whether through the diminishing (of) the creation of new companies and jobs, reducing the availability of medical practitioners, eroding hard-earned pension returns … or threatening the retirement plans of millions of Canadians who pinned their plans on the proceeds of selling a family cottage or a small business … the effects will ripple from coast to coast to coast."

The Canadian Chamber of Commerce, the Canadian Federation for Independent Business, Canadian Manufacturers and Exporters, the Canadian Venture Capital and Private Equity Association, the Canadian Franchise Association and the Canadian Canola Growers Association are signatories.

The 2024 federal budget included a proposal to increase the inclusion rate on capital gains from 50 per cent to 67 per cent for individuals earning more than $250,000 in capital gains in a year, and for all corporations and trusts.

Since releasing the budget, Freeland and Prime Minister Justin Trudeau have faced pushback about the policy from doctors worried about their savings, and start-up-minded entrepreneurs.

The Liberals have repeatedly defended their plan to target Canada's highest earners, and in the process rake in billions in additional revenue, as a fair way to help offset other major investments in housing and Canada's social safety net.

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While the government has vowed this would impact approximately 12 per cent of Canada's corporations and Canadians with an average income of $1.42 million, critics have warned its impacts could be more widely felt by any individual making $250,000 or more in profit on the sale of assets such as secondary or rental properties.

In the initial letter sent, the groups called the government's assertion that the increase of the inclusion rate to 67 per cent would only affect a small percentage of the wealthiest Canadians "misleading," going on to state they believed "one in five Canadians" would be directly impacted over the next decade.

However, that figure, according to a 2023 Simon Fraser University study, refers to an estimate of how many people could be affected if the inclusion rate was increased on all capital gains.

As The Canadian Press first reported, when questioned on this figure the version of the letter posted online was changed to read: "one in five Canadian companies are likely to be directly impacted over the next ten years." 

Last week, Freeland reaffirmed her intention to advance this tax change, opting to leave the needed law reforms out of the omnibus budget implementation bill. Instead, she is planning to table separate legislation focused on this measure that'll move through Parliament on its own timeline, forcing the opposition parties to take a clear stance. 

"We are very committed to the capital gains measures," Freeland said. "Our view is it is absolutely fair to ask those in our country, who are at the very top, to contribute a little bit more."

On Thursday, Freeland's office told CTV News that while it's understandable groups may have questions about new tax changes, when designing the parameters of this policy, it was done with Canadian productivity in mind.

Stating the finance minister remains committed to the plan she's put forward, the individual speaking on background challenged the concerns about hindering economic growth, noting that Canada's average marginal effective tax rate remains more advantageous to new businesses than rates in the U.S. 

According to Finance Canada, in 2021 only around five per cent of Canadians under 30 had any capital gains at all. And, next year 28.5 million Canadians are not expected to have any capital gains income, while three million are expected to earn capital gains below the $250,000 annual threshold.

While Freeland has yet to unveil the legislation, this tax change is expected to apply to capital gains realized on or after June 25, 2024.

The industry organizations are calling on the federal government to scrap the "ill-advised inclusion rate increase" before it comes into effect. They instead want an independent review of Canada's tax system as a whole.

"Under successive governments, our tax system has become a complicated web of carve-outs and caveats. Our country must end its reliance on tax-and-spend politics, which is undermining innovation and growth to the detriment of both today's Canadians and future generations," the letter reads.

"As Canada's economy grows, so too does our tax base – all without the need for tax increases that will hurt Canadians and limit our collective potential… There is a better way. We're prepared to roll up our sleeves and work with you to help Canada get there."

In a separate letter sent Thursday morning, President and CEO of the Business Council of Canada Goldy Hyder echoed the concerns raised by other business groups.

"Based on the information provided to date, we are concerned the proposed changes will further undermine Canada's ability to attract investment and talent," Hyder said in his letter to Freeland.

"More importantly, we believe the debate over capital gains taxes overshadows an even greater issue of concern – that the government's fiscal framework is unsustainable. No tax increases would be required if the government reduced its planned spending and took proactive measures to stimulate growth, such as removing regulatory barriers."