Canadian business groups backtrack on claim about capital gains tax change

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OTTAWA — Prominent business groups have backtracked their claim that one in five Canadians would be affected by the federal government’s proposed changes to capital gains taxation.

In a letter sent to Finance Minister Chrystia Freeland on Thursday, the Canadian Chamber of Commerce and other groups said the government’s assertion that only the wealthiest Canadians will be affected was misleading.

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“In fact, one in five Canadians will be directly impacted over the next 10 years and the effects of this tax hike will be borne by all Canadians, directly or indirectly,” the original letter reads.

But the study from which that figure was taken suggests otherwise.

The 2023 study by Simon Fraser University’s Jonathan Rhys Kesselman estimates one in five Canadians would be affected over a 10-year period if the inclusion rate was increased on all capital gains.

The federal budget only increases the inclusion rate on individuals’ capital gains above $250,000, which means a much smaller proportion of Canadians would end up paying higher taxes.

The new inclusion rate would also apply to all capital gains realized by corporations.

After The Canadian Press asked questions about the figure, the chamber of commerce changed the letter on its website to read that one in five companies would be directly affected.

“We looked into this, and upon review, the language could be more clear to reflect the impact on Canadian companies. We have adjusted the copy in the letter online,” spokesman Karl Oczkowski said in an email.

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The chamber of commerce did not immediately clarify how it arrived at the conclusion that one in five companies would be hit.

The joint letter is signed by the Canadian Chamber of Commerce, Canadian Federation for Independent Business, Canadian Manufacturers & Exporters, Canadian Venture Capital and Private Equity Association, Canadian Franchise Association and Canadian Canola Growers Association.

The groups call on the Liberal government to scrap the tax increase, arguing it will ultimately hurt the economy by lessening competition and innovation.

Kesselman, who was a professor at SFU’s School of Public Policy, died earlier this year.

In his study, Kesselman assessed arguments for and against increasing the inclusion rate, including its potential impact on the economy.

“The overall impact of existing and increased capital gains taxes on the economy’s efficiency and growth are mixed and not easily quantified,” Kesselman wrote.

“However, contrary to common claims, some of these impacts would be economically favourable, while others that might be economically adverse could be mitigated through appropriate concomitant reforms.”

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His study recommended increasing the capital gains inclusion rate above a certain threshold of capital gains or income, so that it would better target a smaller group of individuals with the highest and most recurrent capital gains.

The federal budget proposes making two-thirds of capital gains — the profit made on the sale of assets — taxable, rather than one-half.

For individuals’ capital gains of $250,000 or less, the inclusion rate would remain the same, at 50 per cent.

Ottawa estimates that in any given year, 0.13 per cent of Canadians would pay higher taxes on their capital gains.

Meanwhile, it says only a small share of corporations will be affected, noting in the budget that 12.6 per cent of corporations had capital gains in 2022.

The budget also proposes an incentive for entrepreneurs by reducing the inclusion rate to 33.3 per cent on a lifetime maximum of $2 million in eligible capital gains.

Prime Minister Justin Trudeau‘s government has faced backlash from several groups over the tax changes, including from the Canadian Medical Association.

The physicians’ group has pointed out that doctors with incorporated medical practices will be particularly affected, because all of their investments are made inside a corporation.

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However, Freeland and Trudeau have dismissed the pushback, arguing it’s high time for wealthier Canadians to pay their fair share in taxes.

They’ve also argued the government needs that tax revenue to help pay for things like housing and health care, and deliver “generational fairness” for younger Canadians.

The Liberal government estimates the higher inclusion rate will generate $19.4 billion over the next five years.

The proposed capital gains tax change is expected to come into effect on June 25.

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