Deputy Prime Minister and Minister of Finance Chrystia Freeland gets a shout-out from Prime Minister Justin Trudeau during a caucus meeting on Parliament Hill in Ottawa on April 17.Sean Kilpatrick/The Canadian Press
Geoffrey Turner is a Toronto tax lawyer and adjunct professor at the University of Toronto Faculty of Law and Osgoode Hall Law School. He is seeking the Conservative Party nomination for Etobicoke Centre in the next federal election.
The 2024 federal budget justifies the increased capital-gains inclusion rate (from one-half to two-thirds) on fairness grounds, asserting that only 0.13 per cent of Canadians with the highest incomes are expected to realize gains exceeding the $250,000 annual threshold. Even though it is now apparent the capital-gains tax increase will adversely affect many ordinary Canadians as well, in his recent video Justin Trudeau has doubled down on this equity rationale, saying as he did in 2015 that the richest few should pay a little more.
Bill C-69 proposes the implementing legislation for many of the budget measures but conspicuously omits the contentious capital-gains provisions, for which important details still remain unknown as the effective date of June 25 approaches. Finance Minister Chrystia Freeland promises a separate bill on capital gains before the summer, which she says will force Conservatives to take a stand on tax fairness.
This is disingenuous in two respects. Portraying the separation of the capital-gains measures into a stand-alone bill as a shrewd political strategy to trap Conservatives distracts from the reality: They were evidently a last-minute budget addition to raise revenue and contain this year’s deficit at the promised $40-billion cap. It’s clear that the technical amendments were not released with the budget because the Department of Finance was not given enough time to prepare them and they still are not ready.
Moreover, the Liberals are framing support for the capital-gains tax increase as a choice exclusively about fairness, and in particular how progressive our income tax system should be. They argue that our already steeply progressive taxes – where higher rates apply to higher thresholds of income – should be torqued further, even though the top 1 per cent of tax filers already bear 22.5 per cent of all income taxes paid, and the top 10 per cent pay a whopping 54.4 per cent. But this obsessive Liberal focus on their highly progressive version of tax equity obscures other important objectives of sound tax policy. These include ensuring Canada’s tax system is competitive with other countries, promotes capital investment and productivity improvements, and minimizes unwarranted complexity of compliance and administration. The capital-gains proposals arguably fail on all counts.
In one respect, an increased capital-gains inclusion rate could possibly be justified on equity grounds not because it exacerbates progressivity so the richest Canadians pay more, but rather because it better measures a taxpayer’s ability to pay, regardless of income level. The base of our income tax to which progressively increasing tax rates apply is “income,” which is comprised of incomes from all sources plus, since 1972, one-half of gains from dispositions of capital properties.
The Carter Commission in 1966 had recommended adoption of a comprehensive income base including 100 per cent of realized capital gains as a suitable measure of a taxpayer’s economic power, because “a buck is a buck is a buck,” but in conjunction with much-reduced marginal rates and more generous income averaging. In part to minimize the adverse impact on capital investment, and in part to avoid taxing nominal gains because of inflation, the government of the day instead adopted the arbitrary 50-per-cent inclusion rate for capital gains. Fiscal pressures led to this being increased to two-thirds in 1988, then to 75 per cent in 1990, and then returned to its present 50 per cent in 2000.
There is thus no magic to any particular capital-gains inclusion rate. The policy goal is to appropriately estimate a taxpayer’s ability to pay without taxing inflationary gains or undermining incentives to invest in capital properties. The Carter Commission’s advice was to broaden the base (by increasing the capital-gains inclusion rate), and also to lower the rate of tax that applies to income as comprehensively determined. The Liberals are proposing only to broaden the base, but not to lower the overall rate, which for income over $247,000 is an excessively high 53.5 per cent for an Ontario-resident individual. This heightens the risks to capital investment that so many commentators have warned about. It is also arguably unnecessary because of the separate tightening of the alternative minimum tax base, which as of 2024 will now include 100 per cent of capital gains in any event.
Conservative Leader Pierre Poilievre is facing pressure to take a position on the capital-gains issue. Canadians should reject the Liberal framing as a question solely of tax fairness, for unneeded enhancements to our already steeply progressive income tax system. The Liberals’ capital-gains proposal should be opposed on wider tax policy grounds, particularly its damaging impact on Canada’s already troubled investment climate. And whenever the draft legislation is eventually released, it is unlikely to reduce complexity of the tax system for ordinary Canadians.