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In a significant policy reversal, Canada has canceled a proposed increase to the capital gains tax rate, a move widely criticized by businesses, economists, and opposition leaders. Prime Minister Mark Carney’s office announced the decision on Friday, aligning with Carney’s broader efforts to improve Liberal Party polling ahead of an anticipated federal election.
The original proposal, which aimed to raise the proportion of capital gains subject to tax from 50% to 66.7% for individuals and businesses with capital gains exceeding C$250,000, was met with strong opposition last year. Critics argued that the hike could drive investment out of the country, stifling growth when Canada’s economy was already facing challenges.
Carney’s government also confirmed it would retain the previously proposed increase in the lifetime capital gains exemption to C$1.25 million for small business shares and farming and fishing properties. The exemption will remain a key incentive for entrepreneurs looking to grow and maintain businesses within Canada.
“By scrapping this tax increase, we are sending a clear message that Canada is open for business, particularly to those who want to innovate, build, and create jobs,” Carney stated. “This will catalyze investment and give entrepreneurs the certainty they need to thrive.”
This announcement is part of a broader shift by Carney to reverse unpopular tax measures introduced under his predecessor, Justin Trudeau, to regain favor with voters. The move has already shown signs of improving the Liberal Party’s polling numbers, which had sagged considerably after Trudeau’s departure.
However, the cancellation comes with a cost. While it may boost business confidence, it will also create a significant hole in the government’s tax revenue. The tax hike was projected to raise C$19.4 billion over five years, which the government had planned to use partly for affordable housing projects. As a result, Canada’s fiscal deficit for the 2023/24 period already surpassed C$20 billion, and this latest policy change may further exacerbate the gap.
Despite this, Carney remains hopeful that boosting investment and supporting entrepreneurs will ultimately benefit Canada’s economy in the long term.
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