Capital-gains tax changes will not generate up to federal government revenue estimation: report

Changes in capital-gains taxation will bring in billions of dollars less in revenue than the federal government is forecasting, a new C.D. Howe Institute report predicts.

 

In its spring budget, Ottawa increased the portion of capital gains that are taxed from one-half to two-thirds for companies, and for individuals on annual gains over $250,000. Capital gains are profits made by selling assets such as stocks, bonds and investment properties.

 

The C.D. Howe report, set to be published Thursday, estimates that the higher inclusion rate will bring in around $3.3-billion in additional personal income tax revenue over the next five years. That’s considerably smaller than the $8.8-billion projected by the Department of Finance.

 

The report does not try to estimate the impact on corporate income tax revenues, but it says the government’s estimate of $10.6-billion over five years “appears plausible.”

This is not the first report to question Ottawa’s numbers. In August, the Office of the Parliamentary Budget Officer estimated that the tax change would bring in around $5.8-billion in personal income tax over five years.

 

Taken together, the PBO and C.D. Howe reports cast doubt on the effectiveness of a key Liberal tax policy, which is meant to help pay for an array of housing initiatives announced over the past year.

 

“Don’t take any estimate for cash, it could be much lower,” said Alex Laurin, C.D. Howe Institute’s director of research and the report’s lead author, in an interview. “If you rely only on the amount of revenues that the government is going to collect to defend the tax increase, that’s a wrong benchmark.”

 

Projecting tax revenue from capital gains is difficult. Gains are realized, and taxed, when individuals or companies sell assets – decisions that can be influenced by market conditions, asset price changes and economic cycles.

 

They can also be affected by changes in tax policy. The government, for instance, expects a spike in capital gains tax revenue in 2024 because people sped up their asset sales to avoid the higher inclusion rate, which took effect in June.

 

Mr. Laurin said that it’s impossible to know exactly why his economic model spit out a much lower revenue estimate than the government’s, given that the Department of Finance does not publish its model assumptions. However, he pointed to several possible explanations.

 

He said his projection, which is based on a Statistics Canada model, may be relying on more conservative baseline assumptions about the quantity of capital gains realized in a normal year, and how individuals respond to tax changes.

 

His estimate also puts considerable weight on how different tax policies interact. In particular, much of the revenue that will come from a higher capital-gains inclusion rate would have already been raised owing to changes to the alternative minimum tax, or AMT, framework introduced in 2023. In other words, the government will be getting more revenue through one stream, but less through another.

 

“We’re not measuring a huge amount of net personal income tax revenues over and above what the AMT would have collected,” Mr. Laurin said.

Revenue generation isn’t the only point of debate surrounding the capital gains tax change. There are also questions about who will be hit.

 

The budget said only around 0.13 per cent of Canadians have capital gains above $250,000 in any given year – the implication being that the change will only touch a tiny minority of the wealthiest individuals.

 

Critics, however, say this downplays the number of people who realize large capital gains only rarely, such as when they sell a family cottage.

 

The C.D. Howe report does not try to answer the question of how many people will be affected by the tax change. But it does argue that the lion’s share of increased tax revenue will come from owners of Canadian-controlled private corporations, or CCPCs.

 

Those owners, who will be dinged at both the corporate income tax level and the personal income tax level, include entrepreneurs and professionals, such as doctors and lawyers, who use CCPCs for tax-planning purposes.

 

 

 

This article was first reported by The Globe and Mail