Capital gains tax hike will hurt investment and entrepreneurship, says MEI
02 Mayo 2024 - 7:04AM
Raising the capital gains inclusion rate will deter venture capital
investment and entrepreneurship in Canada, asserts the Montreal
Economic Institute in a study released this morning.
“If the Trudeau and Legault governments are looking to chase
away investment, then they’re on the right track,” says Emmanuelle
B. Faubert, economist at the MEI and author of the study. “We
already have enough trouble attracting investment as it is, and a
tax hike will certainly not reverse this trend.”
In its latest budget, the federal government announced its
intention to increase the capital gains inclusion rate from 50.0
per cent to 66.7 per cent. For individuals, this applies past a
$250,000 threshold, whereas corporations and trusts are subject to
the new inclusion rate for all capital gains.
Following this announcement, the Quebec government under Premier
François Legault said it would do the same. These changes are set
to apply to capital gains realized after June 25th.
For a Quebec investor, this would amount to an increase of 8.9
percentage points, or 33.3 per cent, to the applicable tax rate for
capital gains above $250,000.
The author explains that such a tax increase reduces the
availability of venture capital by lowering projected returns,
while keeping risks just as high – an estimated 90 per cent of
start-ups fail.
A secondary effect of this form of tax increase is the delaying
of potential sales by venture capitalists, which reduces the stock
of capital available to finance new projects.
The MEI study identifies these two effects as responsible for
the fall in investment and entrepreneurship that is associated with
increases in capital gains taxes.
This link is confirmed by a 2022 study, which found that
increased capital gains taxation led to decreased investment and
innovation in US-based venture-capital-backed start-ups, resulting
in a smaller number and lower quality of patents.
“People make their investment decisions by weighing risks
against the potential rewards,” explains Faubert. “If you reduce
the reward, but keep the level of risk the same, investors will be
much less likely to invest, as studies have clearly shown.”
The MEI study is available here:
https://www.iedm.org/wp-content/uploads/2024/05/lepoint052024_en.pdf
The MEI is an independent public policy think tank with offices
in Montreal and Calgary. Through its publications, media
appearances, and advisory services to policy-makers, the MEI
stimulates public policy debate and reforms based on sound
economics and entrepreneurship.
Interview requestsRenaud BrossardVice
President, CommunicationsCell: 514
743-2883rbrossard@iedm.org@renaudbrossard
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