Parliament Hill in Ottawa on Jan. 8. The federal budget tabled last April proposed to increase the inclusion rate on capital gains above $250,000 per year to 66.67 per cent from 50 per cent.Sean Kilpatrick/The Canadian Press
Memo to the next prime minister of Canada: Please kill the zombie tax increase on capital gains.
The hike to the capital-gains inclusion rate is an undead policy right now. Legislation for the change was thrown into uncertainty when Prime Minister Justin Trudeau prorogued Parliament on Monday, yet the Canada Revenue Agency is proceeding as if the increase took effect on schedule last June 25 – standard procedure for tax measures that have been introduced but not yet passed into law.
There’s still time to kill it, as the tax-filing deadline for 2024 is April 30. Then we can move on to some bold changes that will address two of this country’s biggest economic and personal finance challenges: economic productivity, which is key to raising wages and living standards, and unaffordable housing.
The federal budget tabled last April proposed to increase the inclusion rate on capital gains above $250,000 per year to 66.67 per cent from 50 per cent. The change was described as a way to improve tax fairness, particularly for younger people, and to generate revenue to build more homes, create good-paying jobs and drive economic growth.
A higher capital-gains tax might have been sellable if the government had been able to explain specifically how the extra money would have made lives better. As it was, business leaders criticized the tax hike for damaging the economy by discouraging investment and innovation.
Daryl Ching: Prorogation has further muddled the capital-gains tax hike. Ottawa must pause it
Businesses didn’t provide enough investment and innovation under the 50-per-cent rate, but never mind that. Our lagging productivity – basically economic output per hour worked – is a problem that needs attention. An RBC Economics report last year said Canada is 30 per cent less productive than the United States and Canadians’ wages are roughly 8 per cent less than their U.S. counterparts.
If our businesses and entrepreneurs believe that the taxation of capital gains is an impediment to investing, innovation and risk-taking, let’s test that theory. Instead of raising the amount of tax people pay on capital gains, we should cut it. We could try an inclusion rate of 33.3 per cent, for example.
The government expected to generate revenue of $19.4-billion over five years by increasing the inclusion rate on capital gains above $250,000. Cutting the rate would deny the government this money and create a big hole in existing revenues.
Increased economic activity should help fill some of that gap, but not enough. That’s why the next prime minister should remove the capital-gains tax exemption on principal residences – either partly or in full.
One of the reasons for Canada’s weak productivity is that too much money is tied up in real estate instead of other kinds of assets. Given the massive increases in house prices in recent decades, it’s totally understandable. When housing markets heat up, buyers bid against each other and overpay because of the investment potential.
Curtailing the principal residence exemption would reframe real estate as a lifestyle choice rather than an investment. The result would be a calmer market that leaves more money for people to spend on things such as investments in companies that build the economy.
Expect a furious reaction if the principal residence exemption is cancelled, particularly from seniors who consider their home their retirement plan. However, the actual tax hit on houses would not be monstrous. Remember, the taxable portion of the gain would be just 33.3 per cent.
Taxing houses shouldn’t crash the housing market – people still need a place to live and raise a family, right? But it would reduce the speculative pressures that caused house prices to increase way beyond incomes in the past couple of decades. The net result would likely be lower prices in the near term and then modest appreciation going forward.
We seem to have settled on building more houses as an economic cure to unaffordable housing, but it’s a slow-moving process and vulnerable to weak economic conditions. Taxing capital gains from houses is a quicker path to affordability and, just as importantly, a reallocation of capital in the Canadian market that benefits everyone.
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