Canada cancels controversial capital gains tax increase

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Canada cancels proposed capital gains tax increase

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Carney aims to boost investment and improve Liberal Party polling

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Scrapping tax measure may widen government deficit

(Adds quote in paragraph 5, context in paragraphs 3-4 and 6-10)

By Promit Mukherjee

OTTAWA, March 21 (Reuters) - Canada will cancel a proposed tax increase in the capital gains inclusion rate, Prime Minister Mark Carney's office said on Friday, bringing an end to a tax measure that had been widely criticized by industry.

The federal government will also keep the increase in the lifetime capital gains exemption limit to C$1.25 million ($871,930.80) on sale of small business shares and farming and fishing property, Carney's office said in a statement.

Canada's newly elected prime minister has been getting rid of unpopular measures that were partly responsible for tanking the Liberal Party's polling numbers under the leadership of his predecessor, Justin Trudeau.

Polling numbers have improved and show that the party is either ahead or neck and neck with the main opposition Conservatives. Carney is expected to call elections soon.

"Cancelling the hike in capital gains tax will catalyze investment across our communities and incentivize builders, innovators, and entrepreneurs to grow their businesses in Canada," Carney said in a statement.

The government had proposed last April to increase the proportion of capital gains subject to tax to two-thirds from half for businesses and individuals with capital gains above C$250,000 ($174,605).

The measure, which was supposed to have taken effect on June 25 of last year, was not officially implemented through an act of Parliament.

The proposed changes were highly contested and opposed by businesses, economists and opposition leaders, who warned that the measures could chase away investors from the country.

However, the scrapping of the tax measure could drive a huge hole in government tax revenues and expand its deficit, which overshot by C$20 billion for the fiscal year 2023/24 despite the government's promises.

The government had expected the tax to raise close to C$19.4 billion over five years starting from 2024-25, and had planned to use the revenue in part to build more affordable housing.

($1 = 1.4336 Canadian dollars) (Reporting by Ismail Shakil and Ryan Patrick Jones; Editing by Sandra Maler)