CHARLEBOIS: The nonsense about capital gains taxes and the 0.13% (2024)

It’s hard to recall a time when capital gains taxes have drawn so much attention.

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Historically, changes to capital gains taxation have largely flown under the radar. However, the latest modifications are different.

Starting June 25, capital gains up to $250,000 will continue to be taxed at the standard 50% inclusion rate. Gains exceeding $250,000, however, will be taxed at a new inclusion rate of 66.67% for individuals.

Furthermore, the 2024 federal budget introduces two other notable changes: All capital gains generated through a corporation will be subject to the 66.67% inclusion rate, and the lifetime capital gains exemption for eligible property will increase from $1,016,836 to $1,250,000.

These changes raise significant concerns for family businesses, particularly in the agri-food sector where most farms are family-run operations. The Grain Growers of Canada, representing more than 65,000 family-owned farms, recently released a report on these changes. Contrary to Ottawa’s claim that only 0.13% of Canadians, or fewer than 60,000 people, will be affected, the report suggests a much broader impact. According to Statistics Canada, Canada has nearly 190,000 farms, the majority of which are family businesses. The Grain Growers of Canada report indicates that the average farm will see a tax increase of 30% due to the new two-thirds capital gains inclusion rate.

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Generational succession planning is a cornerstone in the agri-food sector, particularly in farming. Currently, less than 1.7% of Canadians are involved in farming, a percentage that is likely to decrease over time. Canada is losing between 700 to 1,000 farms annually. By making farming less financially attractive, the number of farms will continue to dwindle, leading to greater consolidation and fewer family-owned farms.

Farmers are known for their ingenuity and entrepreneurial spirit, and many have accumulated significant assets. However, farmers are often “asset rich, cash poor,” meaning they possess valuable assets such as farmland, quotas, equipment, and livestock but lack liquid cash. This becomes especially challenging with changes to capital gains taxes. If a farmer sells a portion of their land or valuable equipment, they might realize a substantial capital gain. The Grain Growers of Canada report highlights that this financial strain can force farmers into difficult financial positions, requiring them to find ways to generate the necessary funds to meet fiscal obligations.

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Moreover, many farmers plan to pass their farms on to the next generation. Increased capital gains taxes could complicate estate planning and succession, as the tax burden on asset transfers may be higher. This could lead to more family farms being sold off or broken up to pay taxes, potentially reducing the number of family-owned farms and altering the landscape of rural communities.

The impact extends beyond farming. Many family-owned businesses exist in food manufacturing, retail and food service in Canada. According to IBISWorld, Canada has nearly 80,000 full-service restaurants, many of which are family-owned. These businesses could be significantly impacted by the increased capital gains tax.

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Behind every family business, there are hardworking, taxpaying Canadians who will likely be affected by these changes.

While there are exclusions and fiscal measures to assist with asset transfers and generational succession planning, the tax increase disincentivizes investment. If we aspire to grow our economy and increase competition across the agri-food sector, raising taxes to ensure “the wealthy face the same tax burden as nurses” is not the solution. A more effective approach might be to reduce the tax burden for nurses instead.

More broadly, Family Enterprise Canada states that family-owned businesses make up 63.1% of all private sector firms in the Canadian economy, contributing 48.9% to Canada’s real GDP in the private sector, amounting to $574.6 billion. Additionally, they employ 6.9 million people nationwide, representing 46.9% of private sector employment.

Much more than just 0.13% of Canadians are likely affected by these changes. Ottawa needs to reconsider this approach to avoid undermining the backbone of our food economy: Family-owned agri-food businesses.

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