Most small businesses benefit from budget’s capital gains changes

Hey there, time traveller!
This article was published 19/04/2024 (894 days ago), so information in it may no longer be current.

Brandon Chamber of Commerce president Lois Ruston is concerned that changes to the capital gains inclusion rate, announced on Tuesday in the Trudeau government’s Budget 2024, may limit employment growth and harm Brandon businesses.

In remarks published yesterday in this newspaper, Ruston explained that an essential aspect of future economic growth lies in creating a business environment capable of adapting to change. She expressed the concern, however, that the proposed changes to the capital gains tax system could prevent businesses from growing and seizing opportunities.

“Changes to the capital gains system may, unfortunately, limit opportunities for business development and employment growth locally and across the country,” she said.

She was unable to provide specifics as to how Brandon businesses may be impacted in the near term, but said changes such as those regarding capital gains make it difficult for companies to thrive and grow.

“When the potential success of a business is throttled, the investment climate can become threatened, and entrepreneurship stifled,” she said.

Ruston’s remarks echo concerns expressed by business groups and opposition politicians throughout the country. Indeed, Canadian Federation of Independent Business spokesperson Brianna Solberg also expressed concern that the capital gain changes could harm local businesses.

She told the Sun: “The capital gains inclusion rate increase to 66.7 per cent will create many net losers, including owners of medium-sized businesses,” and added, “Owners of professional corporations, financial, insurance, food and accommodation, and personal care services firms … will be hit with more taxes on capital gains for sales of small business shares above $2.25 million.”

Those concerns reflect a distorted and incomplete view of the budget measures, however.

Budget 2024 proposes to increase the taxable portion of capital gains (the “inclusion rate”) from the current 50 per cent to two-thirds for annual capital gains over $250,000.

The change would have no impact at all on the vast majority of Canadians, who are unlikely to have capital gains totalling more than $250,000 in a single year.

Rather, the government estimates that the change would impact only 40,000 individuals — slightly more than one-tenth of one per cent of the country’s population — and approximately 300,000 companies in Canada.

Beyond changes to the capital gains inclusion rate, Budget 2024 also proposes a “Canadian Entrepreneurs’ Incentive,” which would actually reduce the tax inclusion rate from 50 per cent to just 33.3 per cent on a lifetime maximum of $2 million in eligible capital gains.

When combined with the budget’s proposed increased lifetime capital gains exemption of $1.25 million (which would increase by $200,000 each year until 2034), entrepreneurs would have a combined capital gains exemption of at least $3.25 million when selling all or part of a business.

In other words, most Canadian businesses — certainly most Brandon and Westman businesses — would pay lower, not higher, taxes on capital gains as a result of this budget.

Indeed, the explanatory notes for the budget confirm that “entrepreneurs with eligible capital gains of up to $6.25 million will be better off under these changes.”

Viewed from that perspective, with all of the facts and figures in hand, it is difficult to understand the fear that the budget’s proposed changes to the capital gains inclusion rate could hinder business development and employment growth in Brandon and across the country, let alone threaten investment and stifle entrepreneurship.

To the contrary, these combined new measures would appear to benefit most small businesses and the entrepreneurs who own them.