Wednesday, July 24, 2024

Opinion: Why does Ottawa continue to make misleading claims to defend the capital-gains tax?

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Canada’s Deputy Prime Minister and Minister of Finance Chrystia Freeland speaks at a press conference about changes to capital gains tax legislation, on Parliament Hill in Ottawa, on June 10.Patrick Doyle/Reuters

Jake Fuss and Grady Munro are fiscal policy analysts at the Fraser Institute.

On Monday, two months after tabling the federal budget, Finance Minister Chrystia Freeland introduced a motion in Parliament to increase taxes on capital gains. Unfortunately for Canadians, the tax hike will likely hurt Canada’s economy. And the Finance Minister continues to make misleading claims to defend it.

Currently, investors who sell capital assets pay taxes on 50 per cent of the gain (based on their highest marginal tax rate). On June 25, thanks to Ms. Freeland’s motion, that share will increase to 66.7 per cent for capital gains above $250,000. (Critically, the gain includes inflationary and real increases in the value of the asset.)

According to Ms. Freeland, the hike is necessary because it will bring in more than $19-billion of revenue over five years to pay for new spending on housing, national defence and other programs. This claim is disingenuous for two reasons.

First, investors do not pay capital-gains taxes until they sell assets and realize gains. A higher capital-gains tax rate gives them an incentive to hold onto their investments, perhaps anticipating that a future government may reduce the rate. Individuals and businesses may not sell their assets as quickly as the government anticipates so the tax hike ends up generating less revenue than expected.

Second, the government does not have a revenue problem. Annual federal revenue is increasing and has grown (nominally) more than $185-billion (or 66.2 per cent) from 2014-15 to 2023-24. Before tabling the budget in April, the government was already anticipating annual revenue to increase by more than $27-billion this year. But the government has chosen to spend every dime it takes in (and then some) instead of being disciplined.

Years of unrestrained spending and borrowing have led to a precarious fiscal situation in Ottawa. If the government wanted to pay for new programs, it could have reduced spending in other areas. But Ms. Freeland largely chose not to do this and sought new revenue tools after realizing this year’s deficit was on track to surpass her fiscal targets. Clearly, raising taxes to generate revenue was unnecessary and could have been avoided with more disciplined spending.

Further misleading Canadians, the Trudeau government claims this tax hike will only increase taxes for “0.13 per cent of Canadians.” But in reality, many Canadians earning a modest income will pay capital-gains taxes.

According to an analysis by economist Jack Mintz, 50 per cent of taxpayers who claim more than $250,000 of capital gains in a year earned less than $117,592 in normal annual income from 2011 to 2021. These include individuals with modest annual incomes who own businesses, second homes or stocks, and who may choose to sell those assets once or infrequently in their lifetimes (such as at retirement). Contrary to the government’s claims, the capital-gains tax hike will affect 4.74 million investors in Canadian companies (or 15.8 per cent of all tax filers).

In sum, many Canadians who you wouldn’t consider among “the wealthiest” will earn capital gains exceeding $250,000 after the sale of their assets, and be affected by Ms. Freeland’s hike.

Finally, the capital-gains tax hike will also inhibit economic growth during a time when Canadians are seeing a historic decline in living standards. Capital-gains taxes discourage entrepreneurship and business investment. By raising capital-gains taxes, the Trudeau government is reducing the return that entrepreneurs and investors can expect from starting a business or investing in the Canadian economy. This means that potential entrepreneurs or investors are more likely to take their ideas and money elsewhere, and Canadians will continue to suffer the consequences of a stagnating economy.

If Ms. Freeland and the Trudeau government want to pave a path to widespread prosperity for Canadians, they should reverse their tax hike on capital gains.

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