Study suggests that Ottawa’s proposed increase in capital gains tax will diminish competitiveness

January 15, 2025 TruthUSA

Ottawa’s proposed increase to the capital gains tax would position Canada among the countries with the highest rates in the industrialized world, according to a recent study.

If 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, as indicated in a newly released 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,” stated Fraser Institute director of fiscal studies Jake Fuss 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. This 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.

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 stated that the Canada Revenue Agency (CRA) will implement the capital gains tax changes proposed in last year’s budget, even without parliamentary approval.

Despite Parliament being prorogued until March 24, the Finance Department mentioned that the CRA will issue taxpayer forms in accordance with the proposed capital gains rules by Jan. 31.

The Conservatives are against the move. Shadow Minister for Finance Jasraj Singh Hallan has written to Finance Minister Dominic LeBlanc requesting him to retract the capital gains tax hike.

“If he won’t, then at the very least he should direct CRA to halt the collection of this tax until after an election,” Hallan expressed 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 defended that the changes would only affect 0.13 percent of Canadians and 12.6 percent of businesses. The Fraser Institute study argues that the capital gains tax will impact a larger number of individuals than initially promised by the government.

Research presented in the new report indicates that many Canadians earning middle incomes will face higher capital gains taxes.

“It should be emphasized that this change will lead to higher taxes on many Canadian families with modest incomes who may own more than one property, and many professionals (such as doctors, dentists, or lawyers) who have equity in their businesses,” the report states.

Aside from the personal and professional implications, the study suggests that Canada has a lot to lose. If implemented, the tax increase will “almost certainly” have a negative effect on long-term economic growth, impacting Canadian living standards.

How Canada Stacks Up

Prior to the increase, Canada was in the middle tier with a top capital gains tax rate of 50 percent. With the inclusion rate rising to 66.7 percent at the top end, Canada now ranks 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 reveals.

“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 decrease its capital gains tax inclusion rate to one-third or less, it would make Canada one of the most competitive jurisdictions among OECD countries, according to the report’s authors. If the rate dropped 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 significant boost to Canada’s attractiveness as a destination for investment,” the study suggests. “This would foster higher rates of economic growth and help enhance living standards for Canadians.”

The Canadian Press contributed to this report.

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