Capital gains tax changes are terrible optics for Canada

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By Jessica Brandon-Jepp

Since Finance Minister Chrystia Freeland announced a hike to capital gains in last month’s federal budget, we’ve seen countless deep dives into the details of the changes to the tax, which raise the inclusion rate for individuals beyond a certain threshold to 67 per cent, up from 50 per cent. The focus has been almost entirely on who this change affects and how much it affects them rather than on uniting around a common goal: growing our sluggish economy.

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Supporters of the tax hikes have suggested the changes will do little if anything to stifle innovation or deter entrepreneurs from starting or scaling businesses. In making these arguments, they’ve often referred back to 1999, when the inclusion rate was cut to 50 per cent from 75 per cent. That did not result in a flood of new companies being created, they argue, so we shouldn’t expect innovation to dry up if we raise the tax now. But the world today is different than it was in 1999, when we all had landlines and dial-up internet, Netflix was a DVD rental service, China wasn’t yet in the WTO and, arguably, the world’s economies were less intertwined and competitive.

Critics of the capital gains tax hike not only are legion, they’re reputable, credentialled and noteworthy. Kathleen Ross, president of the Canadian Medical Association, says the changes could undermine efforts to recruit and retain physicians and even threaten the stability of the health-care system at a time when Canada is facing a severe doctor shortage. Former Liberal finance minister Bill Morneau argues the changes are antithetical to economic growth, increased productivity and greater investment. Shopify CEO Tobi Lütke believes they will be an innovation killer. Over 2,000 other CEOs, tech managers, entrepreneurs and innovators have express similar concerns, adding their names to an open letter from the Council of Canadian Innovators. Even Tom Mulcair, former leader of the federal NDP, has expressed concern with the capital gains tax hike, indicating it will hit more than just the rich. Yes, Tom Mulcair. We are clearly through the looking-glass now.

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What these critics all recognize but supporters of the changes seem to ignore is that no economy is an island. The global fight for talent and investment is more intense today that it has ever been. We’d all like to see government revenues climb in the face of an aging population, growing demand for social services and the need for investment in public infrastructure. But the way to do these things is not by throttling Canadian businesses with new taxes that will limit opportunities and employment but by fuelling economic growth that improves affordability, government balance sheets and Canadians’ incomes and quality of life.

Among OECD countries, Canada has the 12th highest combined business income tax rate (26.2 per cent), higher than the United States (25.8 per cent), the United Kingdom (25.0 per cent) and the OECD average of 23.6 per cent. Canada’s federal rate has remained unchanged since 2012, while France, Sweden, the U.S. and others have all reduced their rates and become more tax-competitive.

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A post-budget survey by regional innovation hubs MaRS Discovery District, Communitech and Invest Ottawa details how Canada’s top innovators and tech talent are responding to the hike in capital gains taxes. Forty-five per cent of more than 150 startup leaders who responded say they personally are considering relocating outside the country, 23 per cent say they may move their headquarters outside Canada, 60 per cent say the capital gains tax increase will deter investment and innovation and 21.9 per cent say it will harm job creation and talent recruitment.

So, as we all focus on the details, arguing the pros and cons of carve-outs and caveats, our own innovators — and the rest of the world — have yet another reason to look elsewhere for places to invest, build companies, create jobs and provide economic opportunity. Details obviously matter, but the narrative matters more. And our current narrative is one of limiting growth, deterring investment and stifling entrepreneurialism. Not a good story.

Financial Post

Jessica Brandon-Jepp is senior director of fiscal and financial services policy with the Canadian Chamber of Commerce.

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