Prime Minister Mark Carney has officially announced that the Government of Canada will cancel its proposed hike to the capital gains tax inclusion rate.
Carney promised to do this earlier this month after the Liberals elected him to replace Justin Trudeau as party leader and prime minister, following nearly a year of backlash from Canadian technology and business leaders since the Liberals introduced the tax changes in Budget 2024.
The Liberals’ backtrack follows nearly a year of backlash from Canadian tech leaders.
The feds said they intend to maintain the planned increase to the Lifetime Capital Gains Exemption limit to $1.25 million on the sale of small business shares and farming and fishing property. Carney indicated that the government will introduce legislation to facilitate this “in due course.”
Today’s announcement did not mention the Canadian Entrepreneurs’ Incentive (CEI), the other measure the Liberals announced last year to mitigate the impact of their capital gains tax hike. When asked what will become of the CEI, a Department of Finance spokesperson told BetaKit that “more information will come in due course.”
“Canada is a country of builders,” Carney said in a statement. “Cancelling the hike in capital gains tax will catalyze investment across our communities and incentivize builders, innovators, and entrepreneurs to grow their businesses in Canada, creating more higher paying jobs. It’s time to build one Canadian economy—the strongest economy in the G7.”
The announcement comes with another federal election on the way: Carney is reportedly expected to dissolve Parliament this weekend and call a vote for late April. For his part, Conservative leader Pierre Polievre has also pledged to scrap the increase should his party form government.
The Government of Canada initially proposed raising the inclusion rate on capital gains—which include profits from the sale of assets like stock or property—from one-half to two-thirds, meaning that a greater percentage of capital gains would be considered taxable income, potentially bumping some individuals and companies into new tax brackets. The goal was to help the Liberals finance billions in new spending and increase tax fairness.
To mitigate the impact of this hike, the Liberals also shared two other planned measures. The first is an increase to the cumulative LCGE, a longstanding tax exemption designed in part to help encourage risk-taking among small business owners, from $1 million in lifetime capital gains to $1.25 million. The second was the launch of the CEI, a new incentive for people who own at least five percent of a business, which reduces the inclusion rate to 33.3 percent on a lifetime maximum of $2 million in eligible capital gains.
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The proposed capital gains tax changes prompted immediate and loud backlash from many of the country’s tech leaders, who argued it would stifle tech entrepreneurship and investment and exacerbate Canada’s existing productivity challenges. Meanwhile, others argued this reaction was overblown.
The proposed changes were set to take effect on June 25, 2024, but the Liberals never passed legislation to enact them, and earlier this year, the government delayed their implementation until 2026.
“The formal rollback of the capital gains tax increase is a welcome move, but it’s bittersweet—Canada’s reputation in the tech sector has already taken a hit,” Council of Canadian Innovators (CCI) president Benjamin Bergen said in a statement. “The proposed change signalled to investors and entrepreneurs that Canada was becoming a much harder place to succeed, and that kind of uncertainty has real consequences.”
Bergen said that CCI and the Canadian tech scaleups it represents appreciate the move, but argued that rebuilding trust also requires a policy environment that supports domestic firms, especially amid Canada’s ongoing trade war with the United States and global volatility.
Feature image courtesy Mark Carney via LinkedIn.