October 10, 2024 – The 2024 federal budget predicts it will rake in an extra $8.8 billion in personal income taxes over five years thanks to the capital gains tax increase. But a new analysis from the C.D. Howe Institute finds Ottawa could take in more than $5 billion less.
In “Uncertain Returns: The Impact of the Capital Gains Hike on Ottawa’s Personal Income Tax Revenue,” Alexandre Laurin and Nicholas Dahir estimate how much more personal income tax (PIT) revenue the new tax changes will generate. They find that the alternative minimum tax (AMT) will interact with the capital gains tax, resulting in minimal additional PIT revenue from large capital gains beyond what the recently reformed AMT – with its 100 percent inclusion rate – would have collected.
Laurin and Dahir estimate the tax changes will bring in an added $3.3 billion over five years. That’s much lower than the budget’s $8.8 billion projection, and also lower than the Parliamentary Budget Officer’s $5.8 billion estimate.
“We’re not trying to discredit Finance Canada’s model or the budget officer’s model,” Laurin says. “These three very different estimates underline the complexity of projecting revenue gains from these tax changes and emphasize the projections’ dependence on crucial yet uncertain assumptions.”
In addition to their estimate of $3.3 billion, Laurin and Dahir also find that the bulk of the new PIT revenue will come from the owners of Canadian-Controlled Private Corporations (CCPCs). Ranging from doctors and lawyers to entrepreneurs and large-scale operators, owners of CCPCs will face a higher inclusion rate on capital gains earned within their corporations and will see a corresponding reduction in the amount of capital gains they can pay out as tax-free capital dividends.
Laurin and Dahir did not model how corporate income taxes (CIT) will be affected, but they observe that Ottawa’s estimate of $10.6 billion in additional corporate income tax as a result of the taxation changes is plausible when considering historical data on capital gains earned by corporations, especially CCPCs.
For more information contact: Alexandre Laurin, Director of Research, C.D. Howe Institute; Nicholas Dahir, Research Officer, C.D. Howe Institute; and Daniel Kitts, Communications Officer, C.D. Howe Institute, 416-220-8470, dkitts@cdhowe.org
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.