Capital gains tax change draws ire from some Canadian entrepreneurs worried it will worsen brain drain

A chorus of Canadian en‐ trepreneurs and investors is blasting the federal gov‐ ernment's budget for ex‐ panding a tax on the rich. They say it will lead to brain drain and further de‐ grade Canada's already poor productivity.

In the 2024 budget un‐ veiled Tuesday, Finance Min‐ ister Chrystia Freeland said the government would in‐ crease the inclusion rate of the capital gains tax from 50 per cent to 67 per cent for businesses and trusts, gener‐ ating an estimated $19 billion in new revenue.

Capital gains are the prof‐ its that individuals or busi‐ nesses make from selling an asset - like a stock or a sec‐ ond home. Individuals are subject to the new changes on any profits over $250,000.

The government esti‐ mates that the changes would impact 40,000 individ‐ uals (or 0.13 per cent of Canadians in any given year) and 307,000 companies in Canada.

However, some members of the business community say that expanding the tax‐ able amount will devastate productivity, investment and entrepreneurship in Canada, and might even compel some of the country's talent and startups to take their busi‐ ness elsewhere.

WATCH | The federal budget hikes capital gains in‐ clusion rate:

Benjamin Bergen, presi‐ dent of the Council of Cana‐ dian Innovators (CCI), said the capital gains tax has overshadowed parts of the federal budget that the busi‐ ness community would oth‐ erwise be excited about.

"There were definitely some other stars in the budget that were inter‐ esting," he said. "However, the ... capital gains piece real‐ ly is the sun, and it's daylight. So this is really the only thing that innovators can see."

The CCI has written and is

circulating an open letter signed by more than 1,000 people in the Canadian busi‐ ness community to Trudeau's government asking it to scrap the tax change.

Shopify CEO Tobi Lütke and president Harley Finkel‐ stein also weighed in on the proposed hike on X, formerly known as Twitter.

Former finance minister Bill Morneau said his succes‐ sor's budget disincentivizes businesses from investing in the country's innovation sec‐ tor: "It's probably very trou‐ bling for many investors."

Canada's productivity - a measure that compares economic output to hours worked - has been relatively poor for decades. It under‐ performs against the OECD average and against several other G7 countries, including the U.S., Germany, U.K. and Japan, on the measure.

Bank of Canada senior deputy governor Carolyn Rogers sounded the alarm on Canada's lagging produc‐ tivity in a speech last month, saying the country's need to increase the rate had reached emergency levels, following one of the weakest years for the economy in re‐ cent memory.

The government said it was proposing the tax change to make life more af‐ fordable for younger genera‐ tions and fund efforts to boost housing supply - and that it would support produc‐ tivity growth.

A challenge for in‐ vestors, founders and workers

The change could have a chilling effect for several rea‐ sons, with companies already struggling to access funding in a high interest rate envi‐ ronment, said Bergen.

He questioned whether investors will want to fund Canadian companies if the government's taxation poli‐ cies make it difficult for those firms to grow - and whether founders might just pack up.

The expanded inclusion rate "is just one of the other potential concerns that firms are going to have as they're looking to grow their com‐ panies."

He said the rejigged tax is also an affront to high-skilled workers from low-innovation sectors who might have taken the risk of joining a startup for the opportunity, even taking a lower wage on the chance that a firm's stock options grow in value.

But Lindsay Tedds, an as‐ sociate economics professor at the University of Calgary, said the tax change is one of the most misunderstood parts of the federal budget and that its impact on the country's talent has been overstated.

"This is not a major inno‐ vation-biting tax change treatment," Tedds said. "In fact, when you talk to real grassroots entrepreneurs that are setting up busi‐ nesses, tax rates do not come into their decision."

As for productivity, Tedds said Canadians might see im‐ provements in the long run "to the degree that some of our productivity problems are driven by stresses like housing affordability, access to child care, things like that."

'One foot on the gas, one foot on the brake'

Some say the government is sending mixed messages to entrepreneurs by touting tai‐ lored tax breaks - like the Canada Entrepreneurs' In‐ centive, which reduces the capital gains inclusion rate to 33 per cent on a lifetime maximum of $2 million while introducing measures they say would dampen in‐ vestment and innovation.

"They seem to have one foot on the gas, one foot on the brake on the very same file," said Dan Kelly, president of the Canadian Federation of Independent Business.

WATCH | Could the capital gains tax changes impact small businesses?:

A founder may be able to sell their successful company with a lower capital gains treatment than otherwise possible, he said.

"At the same time, though, big chunks of it may be subject to a higher rate of capital gains inclusion."

Selling a company can fund an individual's retire‐ ment, he said, which is why it's one of the first things founders consider when they think about capital gains.

LISTEN | What does a hike on the capital gains tax mean?:

Dennis Darby, president and CEO of Canadian Manu‐ facturers & Exporters, says he was disappointed by the change - and that it sends the wrong message to Cana‐ dian industries like his own.

He wants to see the gov‐ ernment commit to more tax credit proposals like the Canada Carbon Rebate for Small Businesses, which he said would incentivize busi‐ ness owners to stay and help make Canada competitive with the U.S.

"We've had a lot of diffi‐ culties attracting investment over the years. I don't think this will make it any better."

Tech titan says change will only impact richest of the rich

Toronto tech entrepreneur

Ali Asaria will be one of those subject to the expanded capi‐ tal gains inclusion rate - but he says it's only fair.

"It's going to really affect the richest of the rich peo‐ ple," Asaria, CEO of open source platform Transformer Lab and founder of well.ca, told CBC News.

"The capital gains exemp‐ tion is probably the largest tax break that I've ever re‐ ceived in my life," he said. "So I know a lot about what that benefit can look like, but I've also always felt like it was probably one of the most un‐ fair parts of the tax code to‐ day."

While Asaria said Canada needs to continue encourag‐ ing talent to take risks and build companies in the coun‐ try, taxation policies aren't the most major problem.

"I think that the biggest central issue to the reason why people will leave Canada is bigger issues, like housing," he said.

"How do we make it easi‐ er to live in Canada so that we can all invest in ourselves and invest in our companies? That's a more important question than, 'How do we help the top 0.13 per cent of Canadians make more mon‐ ey?'"