Tech Leaders Voice Strong Opposition to Capital Gains Tax Hike

Prime Minister Justin Trudeau is facing a firestorm of criticism and potential exodus of talent and investment from Canada’s vital technology sector following his government’s plan to substantially increase capital gains taxes. 

Industry leaders warn the tax hike threatens to undermine innovation and drive high-paying jobs south of the border at a time when economic competitiveness is already declining.

Venture capitalists, tech CEOs, entrepreneurs and even a former Liberal finance minister are blasting the proposed tax increase as short-sighted and harmful to growth. 

With Canada risking further lagging rival economies if it becomes inhospitable to capital and entrepreneurship, Trudeau faces growing pressure to heed the business community’s warnings and rethink the tax changes. 

Otherwise, Canada’s future as an innovation and technology hub may be dealt a severe blow from an ill-considered money grab by the Liberal government.

Trudeau Faces Pressure to Rethink Tax Changes

The Canadian technology sector is voicing strong criticism of Prime Minister Justin Trudeau’s Liberal government following the recent federal budget proposal to substantially raise capital gains taxes. Tech industry leaders warn the tax hike could drive investment and talent away from Canada.

The 2024 budget, presented by Finance Minister Chrystia Freeland, would increase the capital gains tax inclusion rate from 50% to 66% on amounts over $250,000 for individuals. For corporations and trusts, the full amount of capital gains would be taxed at the higher rate. The measure is projected to raise $19.4 billion in revenue over 5 years.

The capital gains tax increase represents a key source of funding for the Liberals’ sweeping new spending commitments. But technology firms and investors argue hiking taxes on capital gains will undermine innovation and entrepreneurship in Canada.

Benjamin Bergen, president of the Council of Canadian Innovators, said in the organization’s budget response that the best way to boost government revenue is by helping Canada’s innovators drive economic growth. He urged the government to reconsider the tax increase before causing “irreparable harm.”

“At some point before too long, Canadians will go to the polls and judge this government not on its good intentions and future announcements. We will judge this government on the actual results they have driven for the Canadian economy,” Bergen said.

Financial experts are also weighing in on the capital gains tax changes. Derek Holt, vice president and head of capital markets economics at Scotiabank, discussed the budget announcement on BNN Bloomberg. Holt broke down the implications of the government’s plans to increase the capital gains inclusion rate. As a prominent economist, his analysis provided key insights into how the tax hike could impact investment and growth in Canada.

The proposed capital gains tax increase has sparked sharp rebukes from opposition leaders as well. Conservative Party head Pierre Poilievre blasted the Trudeau government, declaring “They have created a stronger government in order to make for weaker and more suffering people. This is not a government that gives people everything they want, it’s a government that takes everything they have.” Poilievre slammed the Liberals for imposing tax hikes that will weaken Canadians financially through bigger government.

Opposition Leader Slams Trudeau Over Tax Hike

Conservative leader Pierre Poilievre also took aim personally at Trudeau over the tax increases, stating “When will this Prime Minister realize that he’s not worth the cost, and that repeating the same thing 9 times and expecting a different result, is the definition of insanity.” Poilievre asserted that Trudeau’s repeated tax hikes and spending sprees are fiscally reckless and harming Canada’s economy and competitiveness. He argued the PM needs to change course rather than doggedly pursue the same failed policies.

The capital gains tax hike is not the only budget measure troubling the tech industry. Boris Wertz, a prominent Canadian venture capitalist, said the Liberals have “lost their plot on innovation and entrepreneurship.” He cited increased bureaucracy, rigid AI regulations, more public sector hiring, and now higher capital gains taxes as problematic.

Kim Furlong, CEO of the Canadian Venture Capital and Private Equity Association, said her group is “baffled” by the capital gains tax increase. She argued it will dampen entrepreneurship, stifle economic growth in key sectors, and hurt job creation.

“CVCA will work tirelessly to reverse this decision,” Furlong declared.

Christian Lassonde, founder of a venture capital firm, blasted the government for punishing investing. “You can’t make this stuff up,” he wrote on X.

Dan Kelly, head of the Canadian Federation of Independent Business, noted the higher capital gains taxes will hit many small and medium-sized business owners when they sell their firms. This includes restaurants, hotels, doctors’ offices, insurance brokers, real estate agencies, and recreation companies.

Armon Shokravi, co-founder of a software company, explained the tax increase from 50% to 66% inclusion will lift the effective capital gains tax rate from 27% to 36% – much higher than the 20% capital gains rate in the United States. He warned this will drive Canadian entrepreneurs and talent south of the border.

Harley Finkelstein, president of Shopify, expressed disbelief at Canada’s decision to hike capital gains taxes when competitiveness is already lagging the U.S. He said the lower Canadian rate was the one advantage on business taxes.

An independent MP shared a text from a tech entrepreneur announcing plans to move to the U.S. over the tax changes. “We’re leaving to a country that celebrates entrepreneurs and innovation,” they said, arguing Canada is no longer competitive.

Former Finance Minister Opposed Capital Gains Tax Increase

Criticism also came from a prominent former Liberal finance minister. Bill Morneau, who served under Trudeau from 2015 to 2020, revealed he rejected proposals to increase the capital gains tax rate while in office.

“This was very clearly something that while I was there, we resisted,” Morneau said, arguing it would undermine economic growth and investment. “From my perspective, this is clearly a negative to our long-term goal, which is growth in the economy, productive growth and investment.”

With the business community voicing such strong opposition, some are questioning the Liberal government’s justification for hiking taxes on capital gains. Proponents argue Canada’s inclusion rate has been higher in the past, reaching 75% from 1990 to 1999.

But global competitiveness has intensified since then. Canada now risks falling further behind rival economies, especially the United States, as a destination for investment and talent. Once lost, those innovative businesses and high-paying jobs often do not return.

Budget Measure Would Substantially Raise Capital Gains Taxes

So what exactly are capital gains, and how will the Liberal’s proposed tax changes affect various taxpayers?

A capital gain represents the profit earned when an asset like property, stocks or mutual funds is sold for more than its original purchase cost. For example, if a cottage was bought for $750,000 and later sold for $850,000, the capital gain would be $100,000.

Under the current 50% inclusion rate, only half of that $100,000 gain, or $50,000, would be subject to income tax. The budget proposes taxing two-thirds of capital gains above $250,000. So the first $250,000 would still be half taxable, while the remaining $50,000 would be two-thirds taxable, or $33,000.

Some capital gains are already exempt from tax, like profits from selling a primary residence. Gains earned inside registered accounts like RRSPs are also sheltered. Only realized investment gains and secondary property sales potentially face the higher capital gains tax rate.

The Liberals argue the tax change mostly affects the highest income earners, with 97% of Canadians having no capital gains or less than $250,000 in gains per year. But business groups counter it will discourage entrepreneurs who aim to sell their firms and retire on the profits.

Those inheriting a property or business and then selling it could also face significantly higher taxes on the capital gains. Estate planners warn about transferring assets to the next generation more carefully under the new rules.

Overall, the technology and business sector sees the Liberals’ proposed capital gains tax increase as hindering investment and growth when Canada can least afford it. With the economy lagging and productivity in decline, penalizing capital and entrepreneurship seems counterproductive to critics.

Unless the fierce backlash prompts a reversal, the tax hike may undermine Canada’s competitiveness and innovation just as global rivalry intensifies. The Liberals say the revenues are needed to fund major new social programs, climate initiatives and deficit reduction. But the business community argues hiking capital gains taxes will do more long-term harm than good.