The Liberal government is making some changes to the capital gains tax exemption that applies to business owners when they sell stock, but advocates say it doesn’t go far enough.
April’s federal budget announced an increase in the “taxable tax rate” that applies to capital gains – profits that individuals and businesses make on the sale of assets such as shares or holiday homes.
The new rules increase the tax rate on capital gains over $250,000 for individuals and on all capital gains earned by corporations and trusts from one-half to two-thirds.
The budget also announced a cut in tax rates for individuals who sell shares in their own businesses. The exemption, called the Canada Entrepreneurs’ Incentive (CEI), reduces capital gains tax to 33% on up to $2 million in lifetime gains.
But on Monday, the government announced it was changing the exemption by broadening the scope of business exemptions and accelerating their implementation.
The Budget proposal stated that only founders who hold at least 10% of the shares in a company would be eligible for the exemption. The government has now removed the founder requirement and reduced the ownership level requirement to 5%.
The period during which an employer must be engaged in the day-to-day operation of the business to benefit from this exemption has been reduced from five years to three years.
The $2 million cap was also meant to be phased in over 10 years but will now be phased in over five years, increasing by $400,000 each year. Sales of fishing and agricultural land are also exempt.
But business advocates argue that the owner’s equity tax exemption does not offset the overall increase in capital gains tax rates.
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“CEI adjustments announced [Monday] “The government’s proposed tax reforms fall short of addressing the damage they will cause to Canada’s innovation economy,” Benjamin Bergen, president of the Council of Canadian Innovators, said in a media statement.
Bergen said the group was calling on the government to completely reverse the changes, warning that failure to do so would alienate potential investors.
“It’s time for government to stop taxing ambition, partner with innovators, and address Canada’s productivity and prosperity challenges,” he said. “The current path is not just wrong, it’s a dead end.”
Dan Kelly, president and CEO of the Canadian Federation of Independent Business, said the change to the exemptions is a “good move” but doesn’t go far enough.
“Hundreds of thousands of small businesses appear to remain specifically exempt, including restaurant and hotel operators; finance, insurance, real estate, arts, entertainment and recreation operators; and professionals such as doctors, lawyers and accountants,” Governor Kelly said in a media statement.
Mr Kelly also argued the changes would not “fully offset” the rise in overall tax rates, and questioned why the expansion of business tax exemptions applied to the real estate assets of fishermen and farmers but not others.
With farmers Agriculture advocates also express concern Regarding the overall change to capital gains tax, one of the main concerns has to do with the sale of farmland, which many farmers include in their retirement plans.
The government appears to have addressed this concern by including agricultural land in the business tax exemption, but the Canadian Grain Growers Association said the change does not eliminate the overall impact of the targeted tax rate hike.
“Patchwork approaches and piecemeal incentives will not deliver the economic growth and support Canada’s grain farmers and rural communities need,” the group said in a media statement.
A spokesman for Finance Minister Chrystia Freeland defended the government’s changes to capital gains tax.
“We are trying to make our tax system fairer; it’s the fiscally responsible thing to do,” Freeland’s spokeswoman, Katherine Kupplinskas, said in an email.
Kaplinskas said the CEI is just one of many tools the government is using to support businesses and encourage investment.
The changes to capital gains tax came into effect through a finance motion in June, but the government still needs to pass the legislation. A draft of the legislation was published on Monday and the government has launched a consultation on the proposals.
