Capital Gains Will Be Taxed More, and These Economists Say It’s a Good Thing

OTTAWA – Canada’s wealthiest individuals and corporations will soon pay taxes on a greater proportion of the capital gains they make, a change that economists say will make the tax system more efficient, despite opposition from groups business.

The federal budget presented Tuesday proposes taxing two-thirds instead of half of capital gains, that is, profits made from the sale of assets.

The increase in the so-called inclusion rate would apply to capital gains over $250,000 for individuals and all capital gains earned by corporations.

The federal government estimates the changes will generate more than $19 billion in tax revenue over five years, helping the Liberals pay for a slew of new spending on things like housing and national defense.

Business groups complain about the changes, which will ultimately cause the companies they represent to pay more taxes.

Organizations such as the Canadian Chamber of Commerce and the Business Council of Canada argue that making companies pay more will ultimately hurt economic growth and productivity.

But several economists point out that the changes would align capital gains taxes with other taxes, such as dividends, and say it’s a change that will actually help productivity and improve the system overall.

Michael Smart, a tax policy expert and economics professor at the University of Toronto, said the changes are a step in the right direction.

“This government is taking action because it urgently needs money, given the deficit situation. We should understand that,” Smart said.

“But you have to give them credit for doing something difficult to fix a real inequality in our tax system, which allows very high-income people, in some cases, to pay a lower tax rate than ordinary Canadians because they get their income.” as capital gains.

Smart said raising the inclusion rate would level the playing field and encourage companies to make the best investment decisions, rather than those that are most tax advantageous.

“We have had a system in Canada that favors capital gains, favors people holding assets for profits, rather than receiving dividends or selling assets to invest in a different stock or a different business venture, etc.,” Smart said.

“That’s not good for productivity. “We should move towards a level playing field so that all investors pay a fair tax rate, taking into account their income, and the same tax rate on all forms of investment.”

Trevor Tombe, an economics professor at the University of Calgary, said treating investments differently in the tax system also means resources are wasted on financial planning.

“This means that there will be more people employed, trying to work out different accounting approaches to minimize the total amount of tax payments and that that effort – that time, that work – that is being spent on tax planning could have been spent on more activities. productive uses,” he stated.

Tombe said companies concerned about taxes being a drag on growth should advocate for a lower corporate tax rate, which is a separate issue from the inclusion rate.

This report by The Canadian Press was first published April 17, 2024.