OTTAWA — Canada’s wealthiest individuals and corporations will soon pay taxes on a larger share of the capital gains they earn, a change that economists say will make the tax system more efficient, despite pushback from business groups.
OTTAWA — Canada’s wealthiest individuals and corporations will soon pay taxes on a larger share of the capital gains they earn, a change that economists say will make the tax system more efficient, despite pushback from business groups.
The federal budget presented Tuesday proposes taxing two-thirds rather than one-half of capital gains — which refers to profit made on the sale of assets.
The increase in the so-called inclusion rate would apply to capital gains above $250,000 for individuals, and all capital gains realized by corporations.
The federal government estimates the changes will generate more than $19 billion in tax revenues over five years, which will help the Liberals pay for a slew of new spending on things like housing and national defence.
Business groups are crying foul over the changes, which will ultimately make the companies they represent pay more in taxes.
Organizations including the Canadian Chamber of Commerce and Business Council of Canada argue that making companies pay more will ultimately hurt economic growth and productivity.
But several economists are pointing out that the changes would bring capital gains taxation in line with other taxes, such as for dividends — and they say it’s a change that will actually help productivity and improve the system overall.
Michael Smart, a tax policy expert and economics professor at the University of Toronto, said the changes are a step in the right direction.
“This government is taking action because they need money badly, given the deficit situation. We should understand that,” Smart said.
“But credit to them for doing a hard thing to fix a real inequity in our tax system, which allows very high-income individuals to, in some cases, pay a lower rate of tax than ordinary Canadians do because they’re getting their income as capital gains.”
Smart said the increase to the inclusion rate would level the playing field and encourage businesses to make the best investment decisions, rather than the ones that are the most tax-advantageous.
“We have had a system in Canada that favours capital gains, favours people holding onto assets to get gains, instead of getting dividends or selling assets to invest in a different stock or a different business venture and so on,” Smart said.
“That’s not good for productivity. We should move towards levelling the playing field so that all investors are paying a fair tax rate, given their incomes, at the same tax rate on every form of investment.”
Trevor Tombe, an economics professor at the University of Calgary, said treating investments differently in the tax system also means resources are wasted on financial planning.
“This means that there will be more people employed, trying to sort out different accounting approaches to minimize the overall amount of tax payments and that that effort — that time, that labour — that’s being spent on tax planning could have been spent on more productive uses,” he said.
Tombe said businesses concerned about taxes being a drag on growth should advocate for a lower corporate tax rate, which is a separate matter from the inclusion rate.
This report by The Canadian Press was first published April 17, 2024.
Nojoud Al Mallees, The Canadian Press
