Capital Gains Tax Hike Comes Into Effect

Today, the federal government’s controversial plan to change Canada’s capital gains tax comes into effect. The inclusion rate – the portion on which tax is paid – has risen to two-thirds from one-half on capital gains realized by companies. The increase also applies to individuals on capital gains above $250,000.

Despite the changes coming into effect today, the actual capital gains legislation has yet to be tabled in the House of Commons and changes could still take place at the committee level to mitigate the impact. The government has indicated they intend to release the legislation this summer, but unless MPs are recalled back to Ottawa during summer recess, we anticipate the actual studying of the legislation by parliamentarians in committee to not take place until the fall.

But why today?

The tax change was first announced in Budget 2024 which was delivered in April, but the new policy goes into effect today. By giving a two-month runway before the changes came into effect, the federal government anticipated that many Canadians would rush to sell their assets to lock in gains at a lower tax rate. According to the budget documents, the government expected this rush to generate approximately $7 billion in additional tax revenue to be realized. This was all done to help reduce the budget's deficit in 2024 at the expense of future tax revenue in 2025 and beyond.

Whenever the legislation process kicks into high gear, CCI will be ready to participate in the discussions, and we're encouraging founders, builders, and enablers of Canada's innovation economy to participate as well.

These capital gains changes were announced as part of the government's most recent budget, which includes $53 billion in new spending over five years. According to Ottawa, the additional $19 billion allocated for housing and affordability initiatives will be balanced by revenues from this tax increase.

The decision has faced strong opposition from Canada's business and tech sector, including ourselves at the Council of Canadian Innovators, for the impact these changes will have on access to talent and capital in our innovation economy.

CCI is committed to advocating for the economic strategies that create well-paying jobs, fuel prosperity for all Canadians, and help companies scale globally. Since the release of Budget 2024, we have advised the federal government against these new taxes, urging instead a focus on a pro-growth agenda to address Canada's productivity and prosperity challenges.

Our advocacy efforts on behalf of innovators, investors, and tech workers include:

• Meeting with Finance Minister Freeland days after the release of Budget 2024 to express concern regarding the impact the changes will have on attracting and retaining highly-skilled tech employees, founders, and investors, and the ripple effects they will have on the entire innovation ecosystem.
• Publishing an open letter with over 2,000 signatures from across Canada's business and innovation economy titled Prosperity For Every Generation.
• Facilitating local prosperity town halls both online and in-person across Canada.
• Diving deeper into policy research with the release of a special Mooseworks report and a Mooseworks Live event featuring leading Canadian economists and public policy experts.
• Equipping business leaders with a toolkit to engage their local politicians on the impact of these changes.

CCI remains deeply concerned that the government is moving forward with these proposed changes without fully understanding their impact on the competitiveness of Canada’s innovation ecosystem and long-term economic prosperity.

CCI is also releasing recommendations today to improve the Canadian Entrepreneurs' Incentive (CEI).

The CEI is essentially a proposed measure to soften the impact for entrepreneurs by providing a larger tax credit that accumulates over time to a total of $2 million after 10 years. However, exceptions to the policy mean that it will not be applicable to many tech workers, entrepreneurs, and builders in our ecosystem, meaning  it does not go nearly far enough to stave off the negative effects of this tax increase.

As it stands, the government's policy proposal for capital gains and CEI risk doing enormous damage to the Canadian innovation economy.

However, at a bare minimum CCI is proposing changes to CEI which would essentially bring Canada in line with the United States' tax treatment of Qualified Small Business Stock (QSBS).

Bringing Canada in line with QSBS would at least mean that we are not at a tax disadvantage with our largest trading partner. As it stands, we have heard from many entrepreneurs that the United States is a far more favourable place to start and grow an innovative business.

However, even if the government adjusts CEI, that alone will not be good enough.

There is a clear consensus among the Canadian technology leaders we have heard from. The best possible course of action would be for the government to simply roll back these capital gains changes.

CCI has always taken pride in working constructively and substantively with Canadian governments, co-developing policies and strategies to ensure that our economy is on the best possible footing for the 21st century innovation economy.

We will continue to do this work, and we will continue to track the capital gains issue closely, and keep you posted on how it unfolds.

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About the Council of Canadian Innovators

The Council of Canadian Innovators is a national member-based organization reshaping how governments across Canada think about innovation policy, and supporting homegrown scale-ups to drive prosperity. Established in 2015, CCI represents and works with over 150 of Canada’s fastest-growing technology companies. Our members are the CEOs, founders, and top senior executives behind some of Canada’s most successful ‘scale-up’ companies. All our members are job and wealth creators, investors, philanthropists, and experts in their fields of health tech, cleantech, fintech, cybersecurity, AI and digital transformation. Companies in our portfolio are market leaders in their verticals, commercialize their technologies in over 190 countries, and generate between $10M-$750M in annual recurring revenue. We advocate on their behalf for government strategies that increase their access to skilled talent, strategic capital, and new customers, as well as expanded freedom to operate for their global pursuits of scale.

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