In the 2024 federal budget, Canada increased the capital gains inclusion rate to two thirds for gains above $250,000. The government framed this as a fairness measure. What it actually did was send a clear signal to every investor, founder, and fund manager paying attention: the rules are changing in ways that make Canadian investment less attractive, and the direction of travel is toward higher costs for taking risk here. Note that the subsequent federal government indicated it would not proceed with the inclusion rate increase — but the damage to investor confidence from the announcement itself was real and the underlying structural problems predate it.
Investment decisions are made at the margin. Nobody builds a company or funds a startup by looking only at the upside. The after-tax return on eventual exit is a central part of the calculation from day one. Consider a founder who starts a company, reinvests for a decade, and sells for a meaningful gain. Under a two-thirds inclusion rate in Ontario, the combined tax on that exit can exceed 35 percent of the total gain. The same founder, having built the same company in Delaware, would face a federal rate of 20 percent on long-term gains with no comparable provincial layer. That differential shapes decisions long before an exit — it shapes where founders incorporate, where they raise money, and where they choose to build.
The argument that capital gains taxes only affect wealthy individuals misreads how capital formation actually works. The people who invest in early-stage businesses, back entrepreneurs, and fund development projects are predominantly those who have accumulated capital through prior successful investments. Making the tax treatment of those gains less favourable does not simply redistribute from wealthy to everyone else. It reduces the total pool of capital available for productive investment. The founders and workers who would have benefited from that capital being deployed here are the ones who lose most when it goes elsewhere.
There is also an inflation problem the current framework ignores entirely. Consider an investor who purchased a commercial property in Toronto for $500,000 in 2004. By 2024 that property might be worth $1,200,000 — a nominal gain of $700,000. But over that same period, general inflation eroded the purchasing power of money significantly. A meaningful portion of that nominal gain is not real wealth creation — it is simply the dollar losing value. Canada taxes the full nominal gain regardless. The result is an effective rate that frequently exceeds the stated inclusion rate on long-held assets, quietly penalising patient, productive investment in favour of short-term activity. Many economists argue that indexing capital gains for inflation would be among the most structurally sound reforms available. Canada has not done it.
The entrepreneurship cost is harder to quantify but just as real. Canada's venture capital ecosystem remains significantly smaller relative to GDP than that of the United States. Part of that gap reflects market size. Part of it reflects the fact that the financial architecture around risk-taking — from angel investment to founder liquidity to reinvestment incentives — is structurally less favourable here. Tax policy is not the only variable, but it is a meaningful one, and it compounds over time.
A coherent reform agenda would stabilise the inclusion rate at a level competitive with peer countries, index gains for inflation on long-held assets, and create clearer incentives for early-stage investment and founder reinvestment. None of this requires abandoning the principle that investment returns should contribute to public revenue. It requires designing a system that balances revenue generation with incentives for long-term productive investment — and that takes seriously the reality that Canada is competing for capital in a world where investors have choices.