In a decisive move, Prime Minister Mark Carney announced on March 21, 2025, that the Canadian government will cancel a planned increase in the capital gains tax inclusion rate, a reversal praised by small businesses and entrepreneurs across the country.
This decision to scrap the proposed hike reflects the government's acknowledgment of the critical role that builders and business owners play in shaping Canada’s future economy. The Liberals had initially proposed increasing the capital gains inclusion rate, which had sparked concerns from diverse sectors, including healthcare and agriculture. The proposed tax increase would have meant that individuals with capital gains exceeding $250,000 would face a higher tax rate on two-thirds of those gains.
In his official statement, Carney emphasized the positive implications of this decision, stating, “Canada is a country of builders. 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.” This outlines the government's focus on stimulating investment and fostering an environment conducive to growth and job creation.
The Liberal government will still proceed with increasing the lifetime capital gains exemption limit for the sale of small business shares and farming and fishing properties to $1.25 million, up from the current $1 million. This particular change, which aims to provide financial relief and promote wealth generation among small business owners, is expected to be formalized through legislation in the near future.
This recent reversal follows a series of criticisms from various quarters regarding the proposed tax hike. The Conservatives voiced strong opposition, characterizing the tax increase as detrimental to healthcare, homebuilding, and the small business sector, stating it could result in “a tax on health care, home-building, small businesses, farmers, and people's retirements.” The Canadian Medical Association also raised alarms, asserting that the tax hike could severely impact physicians who invest their retirement savings through their incorporated medical practices. Such concerns echoed the sentiments of many across Canada, prompting the government to reconsider its approach.
The proposed changes, first unveiled in the 2024 federal budget, faced backlash before they could even progress to final approval. In fact, the proposal was set to be implemented on June 25, 2024, yet it never passed Parliament, effectively dooming it to the legislative order paper following the prorogation of Parliament during debates.
Furthermore, the Canadian Federation of Independent Business reported that 72% of its members opposed the change, expressing fears that such a tax increase would negatively affect their ability to invest in future opportunities. This overwhelming consensus among stakeholders undoubtedly played a role in the government’s recent decision.
As Carney moves to solidify his leadership and establish a robust economic framework, the cancellation of the tax hike comes at a strategic moment. Speculations suggest that he may call for a snap election as early as late April or early May 2025, indicating that economic stability could become a pivotal point in his electoral strategy.
In summary, as the Canadian government pivots away from increased taxation on capital gains, it is also looking to balance budgetary needs with an incentive structure that fosters growth in the small business sector. This shift signifies not only a change in fiscal policy but also a renewed focus on encouraging innovation and entrepreneurship in Canada.
