Achi news desk-
Canadian Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland hold the 2024-25 budget, on Parliament Hill in Ottawa, on April 16.Patrick Doyle/Reuters
Alex Whalen and Jake Fuss are analysts at the Fraser Institute.
Amid a federal budget littered with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already lagging investment climate, and to make matters worse, research suggests it won’t work as planned.
Currently, individuals and businesses selling a capital asset in Canada are subject to capital gains taxes at a 50 per cent inclusion rate, meaning that 50 per cent of the gain in the value of the asset is subject to taxation on the marginal tax of the individual or the business. rate. The Trudeau government is raising this inclusion rate to 66.6 percent for all businesses, trusts and individuals with capital gains over $250,000.
The problems with hiking capital gains taxes are many.
Firstly, capital gains are taxed on a “realisation” basis, meaning the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.
For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means that the Trudeau government is likely to overestimate the potential revenue gains from its capital gains tax increase, given that individual investors will adjust the timing of their asset sales in response to the tax increase.
Secondly, the lock-in effect creates pressure on economic growth as it incentivises investors to stop selling their assets when they otherwise could, preventing capital from being put to its most productive use and therefore reducing growth .
The Budget’s capital gains tax changes are dividing the small business community
And Canada’s growth prospects and investment climate have both been deteriorating. Canada currently faces the lowest growth prospects of all OECD countries in terms of GDP per person. Furthermore, between 2014 and 2021, business investment (adjusted for inflation) in Canada fell by $43.7-billion. Raising taxes on capital will exacerbate both pressing issues.
Contrary to the government’s framing – that this move affects only the wealthy – lagging business investment and slow growth is affecting all Canadians through lower incomes and living standards. Capital taxes are among the most economically harmful forms of taxation precisely because they reduce the incentive to innovate and invest. And although there are taxes on capital gains raises revenue, the economic costs are greater than the amount of tax collected.
Previous governments in Canada understood these facts. In the 2000 federal budget, then finance minister Paul Martin said that “a key factor contributing to the difficulty of raising capital from new businesses is the fact that individuals selling existing investments and re- invest in others pay tax on any realized capital gains,” specific recognition of the effect of lock-in and the costs of capital gains taxes. Furthermore, that Liberal government lowered the capital gains inclusion rate, recognizing the importance of a strong investment climate.
At a time when Canada really needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. Presenting the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canada right now.” It seems that individuals and businesses across the country agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.
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