Federal Budget's Capital Gains Tax Changes Spark Debate Among Small Businesses

The federal budget's proposed capital gains tax hike divides Canada's small business community, raising concerns over economic growth and productivity. The changes aim to address inequality but face criticism from industry groups.

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Nasiru Eneji Abdulrasheed
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Federal Budget's Capital Gains Tax Changes Spark Debate Among Small Businesses

Federal Budget's Capital Gains Tax Changes Spark Debate Among Small Businesses

The federal government's proposed changes to capital gains taxes in the federal budget have divided the small business community in Canada. The budget, presented by Finance Minister Chrystia Freeland on April 16, 2024, includes an increase in the capital gains inclusion rate from 50% to 66.67% for corporations, trusts, and individuals with capital gains exceeding $250,000 annually. The changes are set to take effect on June 25, 2024.

Under the new rules, businesses will have to pay tax, fairness, every, generation on two-thirds of their capital gains income, up from the current one-half. However, the government also introduced the Canadian Entrepreneurs Incentive, which will provide a reduced inclusion rate of 33.33% on up to $2 million in capital gains per individual over their lifetime for qualifying small business share sales. The incentive aims to support small business owners looking to sell their companies.

The Canadian Federation of Independent Business (CFIB) has criticized the changes, with CEO Dan Kelly warning that the exclusion of certain industries, such as restaurants, hotels, arts, entertainment, and professional services, from the incentive appears arbitrary and could ignite a political firestorm. According to Kelly, roughly half of small businesses will be ineligible for the incentive, and the changes could demotivate Canadians from starting or growing small businesses.

Why this matters: The capital, gains, tax, rules, federal, budget are expected to generate $19.4 billion in tax revenue over five years, with the wealthy paying a larger share. However, the impact on small businesses and the potential consequences for Canada's economic growth and productivity have raised concerns among economists and industry groups.

Economists have also criticized the decision to hike taxes, arguing that it goes against the government's drive to improve productivity by encouraging business owners in all sectors to invest in their companies. The CFIB estimates that only 0.13% of Canadians (40,000 individuals with an average income of $1.4 million) and 12.6% of corporations (307,000) will be affected by the changes.

The federal, budget, highlights also includes an increase in the lifetime capital gains exemption for small businesses, farm owners, and fishery owners from $1 million to $1.25 million. Additionally, the exemption for capital gains on the sale of a primary residence will remain unchanged.

While the government defends the changes as addressing structural inequality and funding new spending initiatives, critics argue that the tax hikes could dampen investment and further damage Canada's productivity growth. As Kelly stated, "The budget, highest earners has unfortunately made many doctors and other professionals who operate as small, independent businesses net losers with the increase in the capital gains inclusion rate."

Key Takeaways

  • Federal budget proposes raising capital gains inclusion rate to 66.67%
  • New Canadian Entrepreneurs Incentive offers 33.33% rate on up to $2M gains
  • CFIB criticizes exclusion of certain industries from the incentive
  • Changes expected to generate $19.4B in tax revenue over 5 years
  • Lifetime capital gains exemption for small businesses increased to $1.25M