George Greenwood is the new CEO of the Kelowna Chamber of Commerce
KELOWNA – Now that Parliament is prorogued (until March 24) no bills can be considered/passed. However, the federal Finance Department announced on January 7 that the CRA would continue to collect the higher taxes (as from June 25, 2024) as they were notionally approved in the September 23 Ways & Means motion.
Capital gains taxpayers currently have two options, both unappealing. Pay the new higher rates, the bill never gets adopted, and wait for a refund from the CRA.
Or, don’t pay the higher rates, and be exposed to paying later, plus delinquent fees and interest.
The Conservative party’s stance is that they will not approve the original Bill as tabled in the spring, and the capital gains tax rates will remain status quo, i.e., before the Federal Budget changed them (to reduce the deficit). Provincial budgets would also take a hit if the bill is not passed, and require adjustment. Overall, the new rates were designed to bring in an additional $17.4 billion by 2029.
If a spring election sends the Conservative Party of Canada to government the confusion over the bill thus may be terminated. However, making up the resultant shortfall of $17 billion will be an immediate challenge.
Those expecting or paying capital gains are recommended to work with their financial advisors to choose one of the two paths as the issue remains on the table until Parliament resumes, and the future becomes clearer.
Earlier reactions to the capital gains increases were primarily negative from those expecting to pay capital gains at the increased rates. Particularly in the tech industry, those running a business, or a professional corporation, or foundations, seemed particularly exposed.
Even owners of second homes were negatively impacted, given the steep rise in cottage and second home market values, many of whom were unable to sell their properties under the “old” lower 50% rate in the short time between the budget announcement in April and the start date of June 25.
No legislation has been passed, but the September Ways & Means motion is being used by the CRA as standard practice in collecting higher fees.
If no bill is passed, it is unclear if the CRA would have the capacity to proactively reach out to taxpayers who used the higher inclusion rate, said John Oakley, vice-president of taxation at Chartered Professionals of Canada. Taxpayers may have to take the initiative in requesting a tax refund.
Below are some comments from earlier in the scenario with comments from Canadian Press and the Council of Canadian Innovators.
The April 2024 federal budget announced significant changes in the capital gains tax that surveys from June 2024 said would ”stifle investment” – 90% of respondents said changes would be negative for the tech sector.
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.
Now that Parliament is prorogued until March 24, 2025, the legislation (introduced September 23) will languish. It can come back for debate, but other parliamentary issues may take centre stage, if the Opposition attempts to restart debate where it left off before the holiday break.
Other legislation is also caught up in the Parliamentary pause: Bill C-71, restoring citizenship to the “Lost Canadians”. The March 19 deadline for the revived bill to pass seems to doom it to failure.
The Online Harms Act (two bills) is also caught up in the prorogation.
For more background on the capital gains tax and the pushback from Canadian entrepreneurs, read on.
The Council of Canadian Innovators, with a membership encompassing tech companies, start-ups, entrepreneurs, and a range of other Canadian businesses, has been front and centre on this file.
Note that the changes in the tax remain on the table once Parliament resumes.
Trusts and corporations are affected.
Sources for this information include:
- Council of Canadian Innovators https://www.canadianinnovators.org/
- The Canadian Press, April 17, 2024, Tara Deschamps
- The Canadian Press, January 6, 23025, Anja Karadeglija and David Baxter
“Since the day the budget was tabled, it has been obvious that these tax changes will stifle investment, and make it more difficult for Canadian innovators to create high-paying jobs in the knowledge economy,” said Benjamin Bergen, President of the Council of Canadian Innovators (CCI).
In total, 90% of the innovators responding to CCI’s Canadian Tech Sector Pulse Check for June 2024 say that these changes will be negative for the tech sector.
Of those people, 60% said they believe the tax hike will have a “very negative” impact on investment.
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.
The tax change was first announced in Budget 2024 which was delivered in April, but policy didn’t come into effect until June. 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. This was all done to help reduce the budget’s deficit in 2024 at the expense of future tax revenue in 2025 and beyond.
This key piece of the last federal budget, increasing the capital gains tax inclusion rate, is in limbo. The government’s goal is to increase the rate individuals pay on capital gains above $250,000 from one-half to two-thirds, and for all gains for trusts and corporations.
The government did not include the change in the budget implementation act, instead opting to bring it in as separate legislation which was done in September in a ways and means motion. The relevant bill was not introduced as the House of Commons was caught up in a filibuster from late September until the Christmas break.
Other collateral damage from the prorogation includes:
Indigenous Services Minister Patty Hajdu touted a bill that aims to ensure First Nations communities have clean drinking water and the ability to protect source water as the closest the federal government has come to co-developing legislation with Indigenous Peoples. Seeking to replace a Conservative bill, the First Nations Clean Water Act would ensure First Nations communities receive at least the same funding as other jurisdictions for water treatment, and recognize they have a right to clean drinking water.
The Liberals also announced a bill that sought to create a modern treaty commissioner which would ensure the government was abiding by the terms in modern treaties with First Nations. Communities with modern treaties called for the creation of the commissioner for years, saying they had little recourse when the government failed to uphold its obligations.
The “Lost Canadians” bill which had until March 19 to become law will now die on the floor without Parliament in Session (Bill C-71). Bill C-71 is rightly trying to restore Canadian citizenship to a group of “Lost Canadians” – people who are not Canadian citizens but arguably should be1 – based on the principle that all Canadians, whether born in Canada or abroad, should be treated equally before the law.
More reactions from earlier in 2024 to the Capital Gains changes announcement:
Shopify is one of Canada’s great tech success stories. Here’s what they think:
While capital gains measures are seen as a way to tax the wealthiest, CCI said what’s in the budget could affect tech workers who aren’t in senior positions.
“Those folks who join startups and scaleups as they’re beginning their journey are provided stock options and other benefits, which are ultimately determined as capital gains in the future,” he said.
“It’s marketing experts, sales experts, legal experts that are traditionally mid-career that … you’re completely undermining by this type of policy lever that’s being implemented.”
CCI drafted an open letter to Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland urging them to scrap the tax.
In response to the criticism, Freeland’s office said it pursued capital gains changes to create fairness for younger Canadians who are struggling with the cost of living.
The budget also included a new program that lowers how much tax some small business owners pay when selling their companies. Those who qualify will be taxed on only one-third of their capital gains up to $2 million.
Several Shopify Inc. executives, including President Harley Finkelstein, posted about the capital gains changes Freeland proposed on X. Hours after the budget’s release, he wrote, “What. Are. We. Doing?!?”
“This is not a wealth tax, it’s a tax on innovation and risk taking,” he added. “Our policy failures are America’s gains.”The Ottawa-based e-commerce giant’s chief executive Tobi Lütke also chimed in, saying a friend had messaged him to say, “Canada has heard rumours about innovation and is determined to leave no stone unturned in deterring it.”
Forbes estimates Lütke’s net worth is valued at US$6.4 billion. While he’s been more vocal in his criticism of the federal government’s policy decisions in recent months, he previously chaired a digital strategy table that convened in 2018 and hosted Trudeau at his company’s conference.
Meanwhile, the head of the Canadian Venture Capital and Private Equity Association said on LinkedIn the capital gains changes left her feeling “baffled.”
“This measure, which effectively taxes innovation and risk-taking, will significantly dampen Canada’s entrepreneurial spirit, stifle economic growth in critical sectors of our economy, and impact job creation,” Kim Furlong said.
“Such (a) policy change undermines Canada’s position to attract the talent needed to grow and scale companies here.”
Furlong promised to “work tirelessly to reverse the decision.”
Alison Nankivell, chief executive of the MaRS innovation hub in Toronto, took such reaction to the budget to be a reflection of the tug of war that can pit fairness against economic opportunity.“In some ways, what you’re hearing from the entrepreneur community is a feeling that that balance is maybe not where they want it to be in terms of the ability to build a business,” she said.
The tension masked some of the benefits for the sector she saw in the budget. For example, the government set aside $2.4 billion to boost AI capacity with the bulk dedicated to a fund that would increase access to computing and technical infrastructure.
Nankivell was “really glad” AI was given some attention because she said Canada has to be considering whether it has enough capacity in chips and server farms to power the technology’s future uses.
Money was also allocated toward a program that sees Ottawa work with the private market to co-invest in promising Canadian companies, setting up the Financial Consumer Agency of Canada to oversee opening banking and shaping the country’s approach to cryptocurrency asset reporting.
George Greenwood is the new CEO of the Kelowna Chamber of Commerce and can be reached at george@kelownachamber.org