Ottawa’s handling of the capital gains tax hike has not inspired much confidence among Canadian business owners, says John Wright, a Canadian tech entrepreneur.
Wright has worked 70 to 80 hours a week for the past seven years to build StatsDrone Inc., a company that centralizes marketing data.
Now, he is considering selling the company and has seen interest from potential buyers. He feels pressure to complete the sale this year, he says, because he is unsure whether Ottawa’s postponed capital gains tax increase will take effect next January.
“What kind of government are we dealing with that’s put us in this position in the first place?” said Wright, who says the uncertainty creates an incentive for digital businesses like his to move to more tax friendly jurisdictions.
“I feel like it’s probably not going to happen with this capital gains tax, but I don’t have confidence because I actually don’t know who the next government’s going to be.”
Dan Kelly, president of the Canadian Federation of Independent Business, a business advocacy group, says many businesses are relieved by Ottawa’s decision to defer its proposed capital gains tax increase.
But he says many businesses remain concerned about the tax hike. Some made business decisions or incurred expenses expecting the tax increase to take effect this year. Others say Ottawa’s decision to postpone — rather than cancel — the tax hike fosters further uncertainty.
“I’m very sympathetic to business owners who … made decisions that were not necessarily in their long-term interests, simply because the government announced a policy and then pulled back,” said Kelly.
Significant relief
In April 2024, the federal government announced it would increase the capital gains inclusion rate from 50 per cent to 66.7 per cent. The increased rate would apply to all gains realized by corporations and annual gains greater than $250,000 for individuals. The effective date was set as June 25, 2024.
However, the government did not pass legislation implementing the increase in law. Yet, in early January, the Canada Revenue Agency said it would enforce the increase, even after Parliament was prorogued.
Canada’s business community sharply criticized the agency’s decision.
On Jan. 31, Finance Minister Dominic LeBlanc announced the Canada Revenue Agency would defer the date of the increase from June 25, 2024 until Jan. 1, 2026.
“The deferral of the increase to the capital gains inclusion rate will provide certainty to Canadians,” LeBlanc said in a press release. “Given the current context, our government felt that it was the responsible thing to do.”
But some businesses already made decisions in reliance on the increase taking effect, such as selling assets to record a capital gain before June 25.
Shawn Allen is one of those individuals.
In early June 2024, Allen, who is president of InvestorsFriend Inc., sold shares in a Canadian bank that had significantly appreciated in price, in advance of the expected higher capital gains tax inclusion rate.
“[In] hindsight I would have been better off to wait,” said Allen in an emailed statement.
Businesses collectively spent millions planning for the tax hike, including by hiring tax advisors, says Tara Benham, national tax leader at Doane Grant Thornton LLP, a tax advisory firm.
“Uncertainty always triggers conversations. Conversations cost money, and that’s the really unfortunate part, there really was no value there,” she said.
The Ministry of Finance told Canadian Affairs in an email that the deferral was meant to provide more “certainty to Canadians, whether they be individuals or business owners, as we quickly approach tax season.”
Entrepreneurship unwelcome
Kelly worries Ottawa’s decision to merely postpone the capital gains tax increase misses the broader problem.
The tax policy incited rhetoric that “entrepreneurship was unwelcome in Canada,” he said. “I don’t think that that sentiment has gone away.”
Benjamin Bergen, president of the Council of Canadian Entrepreneurs, has said postponing the tax hike creates uncertainty. The council represents more than 150 Canadian companies.
“The reality is that the government is leaving entrepreneurs and investors in limbo by still refusing to admit they were wrong,” Bergen said in a Jan. 31 press release. “Providing real certainty to Canadians would be to admit once and for all that this was a mistake and move on.”
Kelly questions why the government would not cancel the tax when it has little chance of ever becoming law.
Conservative Party Leader Pierre Poilievre has said a Conservative government would not implement the tax. Mark Carney and Chrystia Freeland, the leading contenders for the LIberal Party leadership, have both also promised to scrap the tax increase.
The tax increase is also being challenged in court.
On Jan. 24, the Canadian Taxpayers Federation, a taxpayer advocacy group, filed a lawsuit arguing Parliament is required to pass tax increases into law before they can be enforced by the Canada Revenue Agency.
“The government failed to introduce legislation, debate legislation, pass legislation, or proclaim the legislation into law, and the CRA was still going to collect billions of dollars from Canadians illegally with the capital gains tax hike,” said Franco Terrazzano, federal director of the federation.
The federation says it plans to proceed with its challenge even though Ottawa has deferred the date it takes effect.
The Canada Revenue Agency said they would not comment on the specific details of court cases.
Kelly says Ottawa needs to focus on creating a stable business environment, especially given the uncertainty created by the Trump administration.
“We are living now with a massive dose of uncertainty in the Canadian business community related to tariffs,” said Kelly. “The goal should be for the Government of Canada is to provide as much certainty as we possibly can on every single other policy that is under their control.”
And these changes should happen soon to convince Canadian entrepreneurs to remain in Canada.
“Everyone is [in] a wait-and-see position right now,” said Wright. “It’s still a little unnerving that we have these dark clouds overhead and we’re going, ‘Do things get better? … I don’t know’.”
