Finance Minister Chrystia Freeland defended the government’s proposed capital gains tax increase, which has drawn widespread criticism from economists and innovators alike, characterizing the move in this week’s budget as a call to Canadians prosperous to contribute more to finance their government’s spending promises.

The budget, released Tuesday, included measures to increase the taxable portion of capital gains from half to two-thirds for corporations and trusts. The change also affects individuals, but only capital gains over $250,000. The new rules will come into effect on June 25.

“To the people who are enriching our country with their work and who are doing very well, we ask that you contribute a little more so that we can make the investments that Canadians need,” Freeland told reporters Friday after a laboratory. tour at the University of Toronto, part of the government’s tour to showcase its budget.

The minority Liberal government said these additional taxes will raise $19.4 billion in revenue over five years, needed to fund spending commitments on housing, health care, defense and scientific research. The Liberals hope to regain support and court young voters in the face of polls that have put them far behind the Conservatives for months.

But the move has angered many tech entrepreneurs and their investors, overshadowing a host of other pro-innovation measures in the budget, including $2.4 billion in funding for artificial intelligence. Raising the capital gains tax will reduce profits for those selling businesses or converting stock options, discouraging new businesses in Canada at a time when productivity is falling, critics say.

Changes to capital gains tax rates have become the most controversial item in the budget, with many in the innovation sector saying the move will chill venture capital investment and deter entrepreneurs from starting up and scaling up. technology companies here.

“There has been uniform frustration,” said Daniel Eberhard, CEO of Vancouver-based consumer financial technology company KOHO Financial Inc.

“It’s symbolic of the variation in how the business community feels about how we get out of Canada’s productivity challenges “versus how the government thinks we do,” Mr. Eberhard said.

As of Friday afternoon, 1,400 Canadian technology CEOs, financiers and other leaders had signed an open letter published by the Council of Canadian Innovators (CCI), an industry group representing domestic companies, expressing their opposition to the increase in capital gains.

Several economists, industry groups and even former Liberal Finance Minister Bill Morneau have also criticized the move, saying it will not help a country that has been beset by weak productivity and per capita economic stagnation.

“It’s not positive for investment in Canada,” National Bank of Canada CEO Laurent Ferreira told shareholders at the bank’s annual meeting, saying it could further slow investment, innovation and wealth creation. .

The budget included several measures that will benefit small business owners and entrepreneurs. Increased the lifetime capital gains exemption for qualified small businesses from $1 million to $1.25 million. That means a small business owner can sell his business and not pay taxes on the first $1.25 million in capital gains.

The budget also introduced a new “entrepreneur incentive,” which will allow business founders to pay less taxes on up to $2 million in lifetime capital gains when they sell their businesses. However, several industries are excluded from this measure and critics argue that many emerging investors will not qualify to receive the preferable tax rate.

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Freeland also met Friday with a small group of innovators and investors to discuss the budget. Among them was the president of the ICC, Ben Bergen, Alison Nankivell, CEO of MaRS Discovery District, startup CEOs Raquel Urtasun and Martin Basiri, venture capitalist Jordan Jacobs and John Ruffolo, managing partner of Maverix Private Equity.

Freeland responded to criticism by saying that academic evidence suggests that raising capital gains taxes will not threaten entrepreneurship or economic growth. But some say the evidence is much less clear than she suggests.

When asked by The Globe what research her department had relied on, Ms. Freeland referred to the work of Trevor Tombe of the University of Calgary, University of British Columbia economics professor Kevin Milligan and the late economics professor at Simon Fraser University Jonathan Kesselman.

In fact, Professor Kesselman conducted a comprehensive review of the academic literature on capital gains in 2023. While he concluded that the evidence on the long-term economic impact of higher capital gains taxes is “mixed and not easy to quantify,” he said the research is more definitive about the impact on startups. He said “economic analysis confirms the adverse effects of higher capital gains taxes” on the creation and success of young businesses.

Among other papers, he pointed to a 2005 European Central Bank analysis of 14 countries that found that a lower tax rate on corporate capital gains increased the share of venture capital investment in early-stage high-tech companies. He also highlighted a 2019 study of 32 countries that found that higher taxes on capital gains “lead to a reduction in startups receiving venture capital in a statistically and economically significant way.”

Katherine Cuplinskas, a spokeswoman for Ms. Freeland, provided The Globe with a list of other researchers studied by the department, including former U.S. Treasury Secretary Larry Summers, but could not provide references to their specific publications used to craft her tax increase. .

Freeland said the changes keep Canadian capital gains taxes in line with jurisdictions such as New York and California. The top effective capital gains tax rate in Canada will be about 36 per cent when the changes take effect, compared to 37 per cent in California and 38 per cent in New York.

But Laurent Carbonneau, director of policy and research at CCI, said the comparison with New York and California “makes no sense to a comical point.”

“California and New York are charging a premium because they can afford it” as global financial and innovation centers, he said. “I don’t think we have the same luxury.”

Editor’s note: A previous version of this story incorrectly referenced PwC Canada employee Trevor Toombs as the author of a report. The story has been amended to correctly attribute the report to author Trevor Tombe.