Ottawa’s proposed increase to the capital gains tax would place Canada among the countries with the highest rates in the industrialized world, a new study suggests.
If the increase is implemented, Canada would have the highest capital gains tax rate among the 37 high-income developed countries in the Organisation for Economic Co-operation and Development (OECD), undermining its competitive edge, according to a newly released Fraser Institute report.
“The evidence is clear—taxing capital gains deters investment, particularly smaller and start-up firms, which in turn slows productivity gains and innovation, all things Canada needs right now to raise living standards for workers,” Fraser Institute director of fiscal studies Jake Fuss said in a Jan.14 release.
“Instead of raising taxes on capital gains, policymakers should consider reducing taxes as a way of attracting much-needed investment, and reversing Canada’s current economic slump.”
The Liberal government tabled notice of a ways and means motion in September to introduce legislation to raise the taxable portion of capital gains for corporations from half to two-thirds. That means Canadian companies are to be taxed on 66.7 percent of their realized capital gains, up from the current 50 percent.
The policy would also extend to individuals whose capital gains earnings exceed $250,000.
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They will pay tax on 50 percent of the first $250,000 of capital gain earned in the year, but 66.7 percent of any gain above that threshold under the new system.
Ottawa has said the Canada Revenue Agency (CRA) will carry out the capital gains tax changes proposed in last year’s budget, even though they have not received parliamentary approval.
Despite Parliament being prorogued until March 24, the Finance Department said the CRA will issue taxpayer forms in accordance with the proposed capital gains rules by Jan. 31.
The Conservatives are opposing the move. Shadow Minister for Finance Jasraj Singh Hallan has written to Finance Minister Dominic LeBlanc asking him to cancel the capital gains tax hike.
“If he won’t, then at the very least he must direct CRA to stop collecting this tax until after an election,” Hallan said in a Jan. 14 social media post. “The tax hike without legislation has created a lawless state of limbo for Canadians by imposing a tax without ever passing it into law.”
Ottawa has maintained the changes would only impact 0.13 percent of Canadians and 12.6 percent of businesses. The Fraser Institute study argues that the capital gains tax will affect far more people than the government promised.
Research presented in the new report suggests that many Canadians earning middle incomes will face higher capital gains taxes.
“It should be stressed that this change will result in higher taxes on many Canadian families that earn modest incomes yet may own more than one property, and many professionals (such as doctors, dentists, or lawyers) that have equity in their businesses,” the report reads.
Aside from the personal and professional stakes, Canada also has a lot to lose, the study suggests. If implemented, the tax hike will “almost certainly” have a negative impact on long-term economic growth, hurting Canadian living standards, it says.
How Canada Stacks Up
Prior to the increase, Canada ranked in the middle tier for its top capital gains tax rate of 50 percent. Now, with the inclusion rate rising to 66.7 percent at the top end, Canada becomes among the least competitive countries in the OECD.
“Canada now has effectively no capital gains tax advantage over more than three-quarters of OECD countries,” the report reads.
“Canada has become less competitive than countries such as Italy, Germany, and Sweden; countries with whom Canada was previously competitive. Simply put, this marked decline in Canada’s capital gains tax competitiveness will make it harder for Canadian businesses, entrepreneurs, and innovators to attract international investment and improve the economy’s productivity.”
If Ottawa were to lower its capital gains tax inclusion rate to one-third or less, that would make Canada one of the most competitive jurisdictions among OECD countries, the report’s authors argue. If the rate were to drop to 33.3 percent, every Canadian province would have a lower top capital gains tax rate than the majority of OECD countries.
“This would provide a considerable boost to Canada’s attractiveness as a destination for investment,” the study says. “This would foster higher rates of economic growth and help boost living standards for Canadians.”
The Canadian Press contributed to this report.
