Leading economist says that legislation should never see the light of day
The Canadian government’s proposed changes to the capital gains tax inclusion rate will impact more individuals and businesses than the policymakers are anticipating – and should be scrapped now.
That’s the message from leading economist and fellow of C.D. Howe Institute, Jack Mintz, who notes that the current government could revive the bill that would aim to pass the reforms into law when parliament returns in March when the prorogation ends – but it could be uncertain until after the election.
Until and unless the proposed legislation is formally scrapped, the Canada Revenue Agency intends to continue to collect tax based on the 67% inclusion rate announced in the budget in 2024.
But while uncertainty could be relatively short term, Mintz warns that the impact of the policy changes are being underestimated by the government which believes that 40,000 individual tax filers and 307,000 corporations would be affected.
However, his analysis using longitudinal data concludes that 1.26 million would be affected over their lifetimes, equating to 4.3% of taxpayers or 22,000 per year. And he found that middle-income earners would be among those hardest hit.
Mintz also warns of the impact if the CRA continues to apply the higher rate on expectation of it becoming law, and then it is ultimately withdrawn by the current or new government.
“The planned measure to increase the capital gains inclusion rate should never see the light of day when Parliament resumes after March 24, nor be revived thereafter by a new government,” he said. “The hike would create a triple threat: harming Canadian businesses, discouraging investment, and penalizing middle-income Canadians.”
Businesses have been among the most concerned about the higher rate and a letter from the CFIB and around 20 industry groups that was sent to former finance minister Chrystia Freeland in October called for it to be reversed.
“The assertion that the increase of the inclusion rate to 66.7% will only affect a small percentage of the wealthiest Canadians is misleading,” the letter stated. “Many business owners, those they employ, and those they serve will also be affected.”
Mintz’s analysis suggests that the planned measure would harm businesses by likely deterring equity financing, discouraging investment, and exacerbating inefficiencies in financial and corporate structures.
He also says that domestic businesses would be disproportionately impacted by capital gains rates increasing investment costs.
Economic Damage
Even those who will not be subject to capital gains tax could face negative impacts from the higher inclusion rate.
Mintz asserts that significant economic damage will be caused by the proposed changes including a $127 billion decline in Canada’s capital stock, a hit to GDP of nearly $90 billion, with a 3% drop in real per-capita GDP. Add to that a loss of 414,000 jobs. Importantly, half of the affected individuals would be earning otherwise less than $117,000 annually, with 10% earning as little as $18,000, excluding capital gains income.
“This would not just be a tax on the wealthy,” Mintz said. “Many middle-income Canadians would bear the brunt of this increase, and the economic costs would ripple across the entire economy.”
The full report Do Not Resuscitate: Increasing the Capital Gains Tax Harms Us All is available on the CD Howe website.
“If the proposed law does not proceed, it would be worthwhile for a government to review capital gains taxation as part of a general tax review that would improve opportunities for economic growth rather than hurt it,” concluded Mintz.
