Delaying Capital Gains Tax Hike is Good. Axing it Would be Better

Published in the Financial Post.

Federal Finance Minister Dominic LeBlanc’s announcement that higher capital gains taxes will not take effect until the beginning of 2026 feels like one of those old good news/bad news jokes. Doctor: “I’ve got good news and bad news.” Patient: “Give me the good news first.” Doctor: “You have time to make a will.” For Canadians concerned about higher capital gains taxes, the news from the minister could have been a lot better.

Not that the later implementation date is bad, given the uncertainty the measure has generated from the start. The April 2024 federal budget proposed to raise the inclusion rate from 50 to 66 per cent for most corporate and other capital gains and for individual capital gains above $250,000. The change was to be effective last June. The government’s motive presumably was to push people who expected to be hit by the higher rate to realize their capital gains before then, thus boosting federal revenue in a fiscal year that we now know featured a deficit some $20 billion higher than the budget forecast. Although the government did not introduce legislation until the fall, and it died with the prorogation of Parliament, the Canada Revenue Agency (CRA) said, consistent with past practice, that it would administer the new system anyway.

As John Tobin and Carl Irvine pointed out in a recent C.D. Howe Institute e-brief, this created an intolerable situation for taxpayers. They could prepare their taxes according to the existing law and run the risk of penalties when the CRA reassessed them. Or they could prepare their taxes using the higher rate, even though, if the changes did not pass, delays in getting refunds out of the CRA and the low interest rate it pays would leave them worse off than if they had followed the existing law.

Tobin and Irvine recommended that, if the government was determined to go ahead with the changes, it should delay the implementation date to give taxpayers clarity about the 2024 tax year. The government has now done that, and so has Quebec, which administers its own provincial income taxes.

The bad news, though, is that Ottawa still plans to go ahead with the changes. Irritating though the June 2024 implementation date was, it was only one — and not the most important — of the many problems with the higher inclusion rate.

Even from the narrow viewpoint of the federal government’s revenue needs, higher capital gains taxes are not good. Reaping a short-term bonus as people rush to realize gains ahead of the deadline does nothing for long-term revenue. Moreover, another e-brief from our institute estimated that the higher rates on personal capital gains would generate only about a third of the revenue the 2024 budget projected over five years. A modest increase in capital gains revenue is no basis for the aggressive spending the current government likes to pursue.

Step back for a broader economic view, and the capital gains tax changes are far worse. Jack Mintz estimated (in yet another C.D. Howe Institute e-brief) that they would reduce Canada’s capital stock by $127 billion, cut employment by 414,000 jobs, shrink GDP by nearly $90 billion and reduce real per capita GDP by three per cent — with most effects showing up over five years.

After a decade of stagnant investment, productivity and living standards, and as we face stark threats to our trade with the U.S., Canada needs tax changes that improve the climate for working, saving and investing here. The capital gains tax hike would do the exact opposite. So although the decision to postpone the change sounds like good news, the government’s determination to go ahead in 2026 is decidedly bad news. Punitive taxes on investment hurt Canadians. Federal fiscal policy should support a growing economy and stop trying to finance ever-higher spending with short-sighted gimmicks. A new government, of whichever party, should announce that the changes will not proceed at all.

That would be genuinely good news. No joke.

Alexandre Laurin is Vice-President and Director of Research at the C.D. Howe Institute, where William Robson is President and CEO.