Written by Mark Jones, Partner, Olafson & Jones Chartered Professional Accountants and 2022-2023 Winnipeg Chamber Board Chair.
In its 2024 budget tabled April 16, the federal government announced an increase in the capital gains inclusion rate to two-thirds, up from one-half, for individuals with gains over $250,000 in the year while corporations and most trusts are subject to the higher two-thirds inclusion rate from the first dollar of gains. The new two-thirds inclusion rate was effective as of June 25, so the announcement timing meant that taxpayers had a 10-week period to trigger and realize gains at the one-half rate.
The Budget release stated it was asking wealthier Canadians to pay a little more for new spending, improved affordability for young people and to help combat skyrocketing housing costs. I’ll leave the macro-economic debate on the strategy to others and instead look at where we are, almost seven months post announcement and more than four months post-implementation date.
In terms of the global view of Canada’s tax system and specifically this change, the annual International Tax Competitiveness Index produced by the Center for Global Tax Policy of the U.S.-based Tax Foundation, which is one of the leading nonpartisan tax policy organizations in the world, ranked Canada’s tax system 15th in 2023, however in 2024 we fell to 17th …meanwhile, the United States improved their ranking by five spots in that same period. In fact, only 2 out of 38 countries fell by more than 2 spots in the 2023 vs. 2024 ranking, Slovenia (6 spots) and Czech Republic (3 spots).
The report specifically cited the capital gains inclusion rate increase as one of the reasons for the downgrade, stating “by increasing its capital gains inclusion rate from half to two-thirds, Canada also hiked its top capital gains rate from 26.7 to 35.8 percent”. They point directly at the increase having a negative effect on business investment and therefore Canada’s economic recovery.
How Is The New Capital Gains Tax Affecting Canadian Business Investment?
Closer to home, the Fraser Institute reports that from 2014 to 2022, inflation-adjusted total business investment in Canada declined by C$34 billion. During the same period, after adjusting for inflation, business investment declined by a total of $3,748 per worker—from $20,264 per worker in 2014 to $16,515 per worker in 2022…yet in other countries, including the United States, business investment has continued to increase.
In our global economy, business investment dollars have more and more options and can choose to do business or invest where the return is greatest. Tax competitiveness is critical piece in attracting business investment into Canada and this change is seen as something of a detriment to attracting investment to grow our economy. In fact, economist Jack Mintz, who is the President’s Fellow of the School of Public Policy at the University of Calgary, writes that the increase will discourage business investment in Canada and predicts that the increase will permanently reduce employment in Canada by 414,000 and gross domestic product (GDP) by nearly $90 billion.
As for where we are today, we are starting to get an answer on if the measure worked as intended and it appears to have fallen short on several levels. In the budget document, the government predicted that this tax measure would bring in a total of $10.6 billion in additional corporate income tax revenues, and $8.8 billion in new personal income tax revenues over the next five years, for a total of $19.4 billion in new tax revenue.
However, in August, the Parliamentary Budget Officer forecasted that the measure will bring in only $17.4 billion. Then in October, the C.D. Howe released a report titled “Uncertain Returns: The Impact of the Capital Gains Hike on Ottawa’s Personal Income Tax Revenue”, which looked at what will be collected for personal tax from this increase and it predicted that only $3.3 billion will be collected…$5.5 billion short of the government’s budget estimate.
How Is The New Capital Gains Tax Being Implemented?
There is also the matter of the implementation of this change, which is still in process and brings more uncertainty to both taxpayers, their advisors and even Canada Revenue Agency. First and foremost, the change is still not passed into law, nor is there a bill in the House of Commons yet, meaning that should the there be an election called, the change could be delayed, altered or scrapped entirely and we stay at the same one-half rate.
Canada Revenue Agency, who is charged with administering the change that isn’t law yet provided guidance that the new forms are still being developed but not yet available, so for corporations that need to file their returns, they should use the new two-thirds rate, calculated manually to file their returns. If they choose not to file their returns with the new rate until the law is actually passed and the new forms and software are available, there will have to be an adjustment filed and interest on the additional amount owing will be charged.
The uncertainty this causes is problematic, to say the least, as the ability to do meaningful tax planning is greatly hampered for businesses and individuals that are thinking about triggering losses to offset gains or any other year end tax planning. The uncertainty also brings higher compliance costs in advisor fees and time and energy spent by taxpayers trying to be compliant in a capital gains system that is akin to nailing Jello to the wall.
Although at this point, I believe the change will become law, there is also the consideration of those that triggered gains in the ten weeks prior to the change, some sold stocks or assets at a less-than-optimal time to avoid the tax hike and are now wondering if the change will ever actually be enacted.
While there had been rumblings of a change in the capital gain tax system for some time, introducing it this way at this critical time in our economic recovery clearly needed a more stable and prepared roll out and implementation. A change of this magnitude being introduced with so much work still to be done makes our tax code less competitive, less transparent, less stable and far less attractive to taxpayers and to businesses looking at Canada as a place to invest.
Connect with Mark on LinkedIn.
***
Want to share your policy expertise and bring value to our community? Submit your content to Gwen Black, Policy & Government Relations Manager.
And check out these upcoming policy events:
