Canadian Businesses Say Tax Hike Risks Deeper Productivity Slump

Canadian Businesses Say Tax Hike Risks Deeper Productivity Slump

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(Bloomberg) — Canada’s decision to increase capital gains taxes was criticized by businesses who warned the move would only exacerbate the country’s investment and productivity woes.

In a bid to raise billions of dollars to help pay for policies to correct a housing crisis which has turned off younger voters, Finance Minister Chrystia Freeland announced the government will tax Canadian companies on two-thirds of capital gains, up from half currently. The change will also apply to individual taxpayers with annual gains over C$250,000 ($181,000). The rules included some exemptions for entrepreneurs and the sale of a primary residence.

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But some businesses said the approach could worsen what the Bank of Canada’s No. 2 official last month called a productivity “emergency.” Canada numbers rate poorly thanks to weak investment in machinery, equipment and intellectual property, the bank’s senior deputy governor Carolyn Rogers said. 

The Canadian Manufacturers & Exporters trade association said Tuesday’s tax measures “threaten to dampen Canada’s already weak investment performance” and deter investment. The Canadian Federation of Independent Business, which represents 97,000 small and medium-sized enterprises, said higher capital gains taxes could “de-motivate” entrepreneurs from growing their businesses.

Technology association Technation also highlighted a lack of solutions for Canada’s “productivity gap” in the budget.

‘Shocking’

“It’s a bit shocking — we’re baffled by their decision to move on this,” Kim Furlong, chief executive officer of the Canadian Venture Capital & Private Equity Association, said in an interview. “It signals a clear lack of ambition for growth and scaling. I am certain that, if not reversed, this will add dire consequences for the continued growth of this part of the equity system in Canada.”

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The policy lands amid a difficult fundraising environment, with low liquidity and merger activity, and no initial public offerings, Furlong said.

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“I think it sends a very negative message,” John McKenzie, CEO of TMX Group Ltd., the parent of the Toronto Stock Exchange, said in an interview on BNN Bloomberg Television about the prospects of tax hikes on the wealthy before the budget was announced. “Let’s be candid, I think this is a mistake for productivity. When you’re talking about more taxes on that income group, you’re talking about the income group that does the most investing into small and medium Canadian companies.”

Tobi Lutke, co-founder and CEO of one of Canada’s most valuable companies, Shopify Inc., posted on X suggesting the tax move would have an anti-innovation effect. 

Tax rises risk driving investment over Canada’s southern border into the US, McKenzie and Furlong both said.

The tax-and-spend approach “may prove to be shortsighted and a high-risk strategy in an environment of low productivity and waning economic drivers,” Scotiabank economist Rebekah Young said in a note to clients. “The government continues to take a punitive approach to corporate taxation despite waning momentum in profitability and compressed margins against persistent inflationary, and relatedly wage, pressures.” 

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