TMX Group CEO Warns Proposed Capital Gains Tax Changes Could Stifle Investment in Canada

John McKenzie, CEO of TMX Group, Canada's largest stock exchange operator, is sounding the alarm over the federal government's proposed changes to the capital gains tax. The planned increase in the taxable portion of capital gains from 50% to two-thirds for certain investors would amount to a 33% tax hike on investing activity in Canada, potentially discouraging investment, particularly in venture-sized companies.

Why this matters: The proposed capital gains tax changes could have far-reaching implications for Canada's economy, potentially deterring investment in key sectors and hindering the country's ability to attract and retain talent. The proposed capital gains tax changes could have far-reaching implications for Canada's economy, potentially deterring investment in key sectors and hindering the country's ability to attract and retain talent. Getting this policy right will be vital for driving growth and innovation in Canada, since the government seeks to balance tax revenue with incentives.

"This increase will add another disincentive to investing in Canada," McKenzie warned. The changes, set to take effect on June 25, 2024, would apply to corporations, trusts, and individual investors with capital gains exceeding $250,000 annually. McKenzie emphasized the unique challenges faced by venture-sized companies, stating, "When we are talking about investing, particularly in venture-sized companies, they don't pay dividends, a lot of them are pre-income so it is a different risk profile that shouldn't be thought of in the same lens as selling a 50-year-old cottage."

The proposed tax measure was unveiled in the April 16 budget but was separated from the implementation bill tabled in Parliament earlier this week, leaving room for potential modifications. McKenzie suggested that the government could mitigate the impact by implementing other policy changes, such as expanding the flow-through share tax credit, which allows resource companies to transfer tax deductions to their shareholders. "If the government was open, there are other policy ideas that we would put on the table," he added.

This is not the first time a Canadian government has considered raising the capital gains inclusion rate. In the late 1980s, the Progressive Conservative government of Brian Mulroney increased the rate but offset the impact with other tax policy changes, including cuts to the corporate tax rate and exemptions for capital gains. The potential impact of the proposed changes is already being felt in the market.

TMX Group reported a 5% decline in capital formation revenue and a 13% drop in equities trading volume in its first quarter compared to the same period in 2023. With the June 25 implementation date approaching, investors and market participants are closely watching for any signs of further adjustments to the proposed tax changes. The federal government's decision on the capital gains tax changes will have far-reaching implications for Canada's investment environment.

The country seeks to attract and retain investment, particularly in innovative and growth-oriented sectors, finding the right balance between tax revenue and incentives will be vital. The concerns raised by TMX Group's CEO highlight the delicate nature of this balance and the potential consequences of tipping the scales too far in one direction.

Key Takeaways

• TMX Group CEO warns of 33% tax hike on investing in Canada due to proposed capital gains tax changes.
• Changes would apply to corporations, trusts, and individual investors with capital gains exceeding $250,000 annually.
• Venture-sized companies would be disproportionately affected due to their unique risk profile.
• Government could mitigate impact by implementing other policy changes, such as expanding flow-through share tax credit.
• Proposed changes could deter investment in key sectors and hinder Canada's ability to attract and retain talent.