CFIB says some significant changes are required to avoid harming investment
The Canadian government’s recent budget proposed some changes to capital gains taxation that will divide business owners into those that will benefit and those that will not.
The Canadian Federation of Independent Business has polled owners of SMEs on the proposed changes applicable when they sell the shares of their business. They include increasing the Lifetime Capital Gains Exemption (LCGE) to $1.25 million and introducing a new Canadian Entrepreneurs' Incentive (CEI) which would mean some owners would only pay 33.3% on the next $2 million.
Almost two thirds of respondents said that the LCGE increase is positive, and most are also in favour of the CEI as a concept but only 45% feel they will benefit from it without changes.
But while some of the federal budget proposals were viewed positively, more than seven in ten respondents said that those relating to capital gains taxation would weaken growth and investment, and more than six in ten are against them without changes.
"The proposals in the federal budget have huge potential consequences, and many small business owners are feeling forced to make important decisions with little time and very few details," said Dan Kelly, CFIB president. "It is outrageous that the federal government has not yet shared draft legislation to allow small business owners and their advisors to understand the full implications of the capital gains changes."
Recent CFIB polling revealed a continued decline in business confidence.
Investments held by businesses
Another concern for business owners relates to the investments they hold in their companies, which CFIB research shows includes property and land (48% of owners do) and stocks or other investments 33%).
The inclusion rate for these holdings will increase to 66.7% in the summer, which Kelly says will be deeply harmful.
"While many business owners hold outside investments in their corporations to help with their retirement planning (75%), over half (53%) use these investments to help save for economic downturns, like the one Canada has experienced over the past several years,” he said. "With rapidly rising business bankruptcies across Canada, now is not the time to raise taxes on the rainy-day funds of small businesses owners.”
Calling for change
The CFIB says that changes are required to the proposals for them to work. It’s calling for the government to:
- Protect the increase in the Lifetime Capital Gains Exemption to $1.25 million
- Expand the new Canadian Entrepreneurs' Incentive to include all entrepreneurs:
- Include all sectors, including farmers and fishers selling assets
- Include non-founders to encourage people to invest in small firms
- Cut the 10-year implementation schedule in half
- Scrap the planned increase in the general inclusion rate to 66.7%. If government is unwilling to abandon this plan, it should:
- Grandfather all existing capital gains using a V-Day (valuation day) as was done in 1971
- Allow corporations to benefit from $250,000 each year at 50% inclusion like individuals
- Allow for 5-year income averaging to benefit from the $250,000 annual threshold for larger capital gains for irregular events, like selling a property
"After all the stress and effort entrepreneurs go through to open a business and create jobs, will they want to continue to grow their business in Canada given the proposed capital gains changes?" said Corinne Pohlmann, Executive Vice-President of Advocacy at CFIB.
