Capital gains changes could have ‘irreversible’ effects, business groups warn

Deputy Prime Minister and Minister of Finance Chrystia Freeland waits for the start of a TV interview after tabling the federal budget on Parliament Hill in Ottawa, on Tuesday, April 16, 2024.

Business groups are warning Finance Minister Chrystia Freeland that increasing Canada’s capital gains inclusion rate will have “significant knock-on impacts” if implemented with possible “irreversible repercussions.”

Six of the country’s largest industry organizations wrote in an open letter to Freeland Thursday that the proposed hike will impede economic growth and come at the expense of future generations.

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

“While this proposed measure attempts to provide a solution to Canada’s deficit, it is shortsighted and complex, and it sows division at a time when we need a Team Canada approach to economic growth.”

The letter was signed by the heads of the Canadian Chamber of Commerce, the Canadian Federation for Independent Business, Canadian Manufacturers and Exporters, the Canadian Venture Capital and Private Equity Association (CVCA), the Canadian Franchise Association and Canadian Canola Growers Association.

Freeland tabled the federal government’s 2024 Budget on April 16, which included a proposal to raise the inclusion rate — the portion of capital gains on which tax is paid — to 66.7 per cent for individuals realizing more than $250,000 in capital gains annually.

The changes would also apply to all annual capital gains realized by corporations and trusts.

While not included in the budget implementation bill, Freeland told reporters on April 30 that the legislation for capital gains tax changes is still coming, and the Liberals are committed to implementing it on the budget’s planned June 25 date.

“We are very committed to the capital gains measures that we put forward in the budget,” she said during a press conference in Ottawa.

Part of Budget 2024 aims to address Canada’s growing productivity crisis by providing additional support to businesses. The business groups’ letter says there are positive measures in the budget that will help small businesses, such as increasing the Lifetime Capital Gains Exemption to $1.25 million. But bumping the inclusion rate to nearly 67 per cent on some capital gains is “deeply concerning” for Canada’s “business community writ large.”

“At a time when we are already urgently struggling to reignite our nation’s lagging productivity, increasing taxes on productive investments and throttling Canadian potential will have profound, long-lasting and potentially irreversible repercussions,” it says.

Freeland and finance officials billed the move as a change to make taxation more equal.

But Freeland’s assertion that the tax change will only affect a small number of the wealthiest Canadians is “misleading,” the letter says.

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“The effects of this tax hike will be borne by all Canadians, directly or indirectly,” it says.

Video: ‘It’s absolutely right’: Freeland addresses capital gains tax adjustment concerns

The groups adds that the tax change will have significant “knock-on impacts” felt across the country, including limiting the creation of new companies and jobs, stifling growth of multi-generation businesses and reducing the availability of health-care practitioners.

Doctors and medical associations began raising red flags about the capital gain increase soon after the budget was tabled, claiming it could affect recruitment and retention of physicians in Canada.

Freeland, who was asked about whether doctors should receive an exemption from the proposed changes at an event promoting Budget 2024 last month, focused on the high bar for individuals paying more on their capital gains profit.

“It is fair to ask those who are doing really well to contribute a little bit more,” she told reporters at the time.

The 2024 Budget ultimately promises fairness for every generation, but the letter issued Thursday argues increasing the capital gains inclusion rate will achieve the opposite.

“Generational fairness should consider the actions we are taking today at the expense of our future prosperity,” the letter says.

“At this important juncture, Canadians should be united around a common goal: increasing Canada’s economic opportunity.”

— with files from Global News’ Craig Lord and Sean Previl