Memo to Canadians: the adjusted capital gains tax will still constitute a very generous tax break for the wealthy

OTTAWA—Let’s try to get this into perspective. There may be persuasive arguments for keeping the favourable capital gains tax rate unchanged. But suggesting the changes proposed by Finance Minister Chrystia Freeland are somehow grossly unfair to the few mostly wealthy people who will be affected is not one of them. The revised capital gains taxation measures in the 2024 budget simply mean those who make a hefty profit on the sale of assets—generally well-off Canadians—will not enjoy quite as much of a special income tax break as they did previously. But companies and individuals making profits on the sale of assets will still enjoy special tax treatment. Unlike employees, who have to pay income tax on 100 per cent of their earnings, people benefitting from capital gains on investments will only have to pay income tax on 66 per cent of the profit from the sale of their assets. And that’s under the new, increased capital gains inclusion rate put forward by Freeland on April 16. Previously, beneficiaries of capital gains only paid income tax on half of what the average person would pay on the same employment earnings. And, just to clear up one apparent misunderstanding: the new capital gains measure would not have any effect whatsoever on the capital gains exemption homeowners enjoy on the sale of a principal residence. How much people should pay in tax when they make money on investments, as opposed to employment income, has been debated in Canada for 60 years. Arguing that “a buck is a buck,” the 1966 Royal Commission on taxation contended that all income should be taxed equally, including gains on assets and investment. But when capital gains taxation was introduced in 1972, the federal government only taxed 50 per cent of capital gains at an individual’s highest marginal tax rate. It is well established that the favourable treatment of capital gains disproportionately benefits the rich and companies, and contributes to the outrageous income inequality that is undermining Canadians’ confidence in their political and economic systems. The tax break on capital gains for individuals and businesses has been costing the federal government at least $35-billion a year in foregone revenues, the bulk of which goes to wealthy Canadians. For instance, a study by University of Toronto economists Michael Smart and Sobia Hasan Jafry found that the richest 0.01 per cent of families—whose total income including capital gains exceeded $6.9-million—on average declared $6.1-million in realized net capital gains that were subject to tax, accounting for 11 per cent of the total of such gains for all families. Spreading the focus wider, they found that the top one per cent of wealthiest families accounted for 57 per cent, and the top 10 per cent accounted for 82 per cent of net capital gains. Further to that point, Freeland said that—taking into account her decision to allow the first $250,000 in an individual’s capital gains annually to be taxed on the old 50-per cent inclusion rate—only a tiny fraction of taxpayers will be affected by the new rules. The budget forecasts just 0.13 per cent of Canadians—people with an average income of about $1.4-million a year—will pay more in personal income tax on their capital gains as a result of the new approach. And, to balance the measure, the budget increased to $1.25-million the lifetime capital gains tax exemption on the sale of small business shares, and farming and fishing property. Over five years, the new capital gains inclusion rate is expected to bring in nearly $20-billion to finance new federal spending plans aimed mostly at trying to fix the housing mess. This capital gains reform is part of the Trudeau government’s broader campaign to reduce the yawning wealth gap, including higher income taxes on the very rich, banks, house flippers, and corporations using stock buybacks or paying CEOs with stock options. As expected, the rich are dead-set against the idea of picking up a bit more of the tab for Canada’s socio-economic programs through an adjusted capital gains tax. Opponents of the new measure are probably right in saying that it will in the short term bring about some reduction in investments that are needed to help the idling economy. But there’s no proof there will be a lasting impact. Beyond that, we know that a decade of personal and corporate tax cuts under the Paul Martin and Stephen Harper governments failed to produce the hoped-for economic boom. Even medical associations, which should have a more calibrated sense of social justice, have joined with much of the business community weighing in against the capital gains tax change. We’ll see over the next little while if the government sticks with this modest attempt to rebalance the wealth picture for Canadians. Les Whittington is a regular columnist for The Hill Times. The Hill Times

Memo to Canadians: the adjusted capital gains tax will still constitute a very generous tax break for the wealthy

We know that a decade of personal and corporate tax cuts under the Paul Martin and Stephen Harper governments failed to produce the hoped-for economic boom.

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Memo to Canadians: the adjusted capital gains tax will still constitute a very generous tax break for the wealthy

We know that a decade of personal and corporate tax cuts under the Paul Martin and Stephen Harper governments failed to produce the hoped-for economic boom.

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