The Canadian government’s recent proposal to increase the tax inclusion rate on capital gains has sparked significant opposition from business groups. The planned hike, announced in the latest budget, will raise the inclusion rate from 50% to 66.7%. This change is scheduled to take effect on June 25 and is part of the government’s broader effort to generate $19.4 billion in revenue over five years.
Six major industry associations, including the Canadian Chamber of Commerce and the Canadian Venture Capital and Private Equity Association, have urged the government to cancel the proposed tax hike. In a letter to Finance Minister Chrystia Freeland, these groups warned that the increase would have detrimental effects on businesses and the broader economy. They argue that one in five Canadians could be directly impacted over the next decade, contrary to the government’s claim that only 0.13% of Canadians and 12.6% of businesses will be affected.
The letter highlights several potential negative impacts of the tax hike. For instance, the Canadian Medical Association has pointed out that many doctors who incorporate their practices will face a higher tax burden, potentially making it harder for Canadians to access medical practitioners. Additionally, individuals who own investment properties and make large gains will face higher taxes, which could disincentivize investment in real estate.
Business owners are also concerned about the impact on their retirement planning and economic resilience. According to the Canadian Federation of Independent Business (CFIB), 75% of business owners use investments held in their companies for retirement planning, and over half use these investments to save for economic downturns. The proposed tax increase could significantly diminish these safety nets, especially during a time when many businesses are still recovering from recent economic challenges.
The CFIB has called for several changes to the proposals to mitigate their impact. These include protecting the increase in the Lifetime Capital Gains Exemption to $1.25 million, expanding the new Canadian Entrepreneurs’ Incentive to include all entrepreneurs and sectors, and scrapping the planned inclusion rate increase. Suppose the government insists on proceeding with the tax hike. In that case, the CFIB suggests implementing measures such as exempting all existing capital gains and allowing corporations to benefit from a $250,000 annual threshold at the 50% inclusion rate.
