The Liberals’ increased capital gains tax rate will likely hurt the country’s competitiveness globally. A new study finds its effects will reverse “investment, productivity, entrepreneurship, and innovation in Canada.”
According to research released by the Fraser Institute, increasing the number of Canadians included in the new capital gains tax bracket will ultimately lower the country’s “competitiveness relative to other advanced countries.”
“At a 50% inclusion rate, Canada’s top capital gains tax rate ranked between 17th and 23rd, depending on the province, out of 37 OECD countries,” reads the study.
The newly hiked capital gains tax was part of the Liberals’ 2024 federal budget, requiring Canadians making more than $250,000 in capital gains annually to pay taxes on two-thirds of that profit instead of half.
The Department of Finance said that the $250,000 threshold was created to “ensure this increase in the capital gains inclusion rate is concentrated among the wealthiest, while keeping taxes lower on the middle class.”
According to the 2024 Budget, the tax should only affect “0.13% of Canadians with an average gross income of $1,411,000 per year (including capital gains) would face higher capital gains taxes as a result” in 2025.
However, the Fraser Institute takes issue with the government’s figure, saying that it misrepresents how far the tax extends. The study noted how capital gains taxes are “incurred infrequently and involve assets purchased decades ago that have significantly appreciated in value.”
“A small business owner selling a business at retirement or a family selling their cottage represents two instances that may occur only once or twice in a lifetime, generating capital gains far exceeding what could be considered a modest income,” reads the study.
“In these cases, the year in which individuals sell their assets—and realize a capital gain—becomes a year in which their income is greatly inflated and not representative of their typical earnings.”
For example, an individual who earns $80,000 per year may take in a capital gain of $400,000 the year that they decide to sell their cottage, which they may have owned for decades. Despite otherwise earning a middle-class income, that individual will have to report earnings of $480,000 that year, meaning that they have well exceeded the $250,000 threshold.
That individual would now be forced to pay higher taxes under the Liberals’ expanded inclusion rate.
The government’s decision to raise the inclusion rate to 66.7% moves Canada up the ranks of between eighth and 13th highest of any OECD country, depending on the province.
“Simply put, Canada now has effectively no capital gains tax advantage over three-quarters of OECD countries,” said study authors Jake Fuss and Grady Munro.
The study goes on to say that by reversing such actions and lowering the inclusion rate to one-third of the population, Canada could put itself back on the map in terms of global competitiveness.
“At a 33.3% inclusion rate, Canada’s top capital gains tax rate would rank between 30th and 31st. In other words, every Canadian province would enjoy a lower top capital gains tax rate than the majority of OECD countries,” it said.
Despite Prime Minister Justin Trudeau’s resignation and subsequent proroguing of Parliament, the Canada Revenue Agency confirmed it will continue to administer the Liberals’ increased capital gains tax rate.
The CRA intends to do so even though it hasn’t passed in Parliament.
The Fraser Institute projects that entrepreneurs and innovators will be hurt the most by these changes. Additionally, “investors may sell off their share of whatever new technology or business is created.”
“By depressing the level of entrepreneurship and innovation, capital gains taxes ultimately lower technological advancements, employment, and overall economic growth productivity and overall economic growth,” it said.
The study emphasized the importance for the government to recognize that Canadian businesses are also competing with other businesses globally, not just domestically.
The new increase is not only detrimental for higher taxes “relative to what they used to be within Canada, but that it raises Canada’s capital gains taxes relative to other countries towards which capital investments could be redirected.”
However, the authors argue that a reversal of the Liberal’s recent decision “would foster higher rates of economic growth and help boost living standards for Canadians.”
