2024 Canadian Budget Update
At a critical time when the Canadian economy needs more investment capital while having productivity challenges, the Government wants a bigger piece of the capital gains pie?
As an investment bank dedicated to raising capital for companies, it is crucial to bring to your attention to the significant changes proposed by the Liberal government concerning the capital gains tax. This change could substantially impact investment dynamics, capital formation and outflow in Canada.
The government's plan to increase the inclusion rate for capital gains exceeding $250,000 from 50% to 66% is expected to be implemented on June 25, 2024. This change will apply universally, affecting individual taxpayers as well as corporations and trusts, with no exemptions beyond the stated threshold. This adjustment poses a direct challenge to capital-intensive industries by potentially reducing the attractiveness of investments in substantial assets, such as stocks, properties, and business ventures.
Moreover, these changes arrive at a time when attracting capital to Canada’s main industries—technology, natural resources, and manufacturing—is more critical than ever. As a nation rich in natural resources and with advanced manufacturing capabilities, Canada should be leveraging these assets to attract global investment. Instead, the proposed tax adjustments may jeopardize our competitiveness and the attractiveness of Canadian companies to both domestic and international investors. For example, in 2023, the technology sector in Canada attracted over CAD $3.2 billion in venture capital, underscoring the significant role these industries play in our economy.
Accessing growth capital for entrepreneurial companies looking to go public on the CSE, NEO, TSX or TSX-V has been the backbone of attracting global companies to list in Canada. Investors usually look to invest in companies early and achieve large gains, benefiting from the favorable capital gains tax environment. The proposed tax increase could significantly disrupt this dynamic, thereby crowding out investment and reducing the growth of emerging companies.
For institutional investors, the proposed tax changes necessitate a strategic reassessment of investment approaches, particularly in terms of long-term asset allocation and exit strategies. The increased tax burden may likely shift the landscape of expected returns, making it imperative for investors to recalibrate their financial models and investment thresholds.
At ArcStone, we understand the importance of working with global capital providers to finance your business. Our expertise in structuring deals, negotiating transactions, and crafting bespoke financial solutions aligns with the need to adapt to evolving market conditions. With the upcoming changes to Canada's capital gains tax putting downward pressure on new investment capital from Canadian-based investors, we are committed to supporting our clients in navigating these changes with strategic insights and advisory services that consider the new capital gains tax implications.
Given the proposed changes, we will be intensifying our efforts to facilitate discussions between our clients and investors. It is imperative to ensure that our Canadian investment environment remains robust and attractive to institutional investors, thereby supporting the ongoing success of businesses across Canada.
