Recent progress made on tax fairness is at risk of being rolled back. During the leadership race, new Liberal Party leader Mark Carney announced he would not go ahead with changes to the capital gains tax announced in the 2024 federal budget. This decision will reduce government revenue at a critical time and make the tax system less fair for workers.
A capital gains tax is a tax on the profit you make when you sell certain types of assets, like stocks, bonds or real estate other than your primary residence. Currently, only 50% of this type of profit is considered taxable income for people and corporations. That is called the capital gains inclusion rate.
In the 2024 federal budget, the Liberal government proposed to raise the capital gains inclusion rate from 50% to 66.7% for annual capital gains over $250,000 for individuals and for all capital gains realized by corporations and trusts.
Abandoning the planned increase in the capital gains tax will have a big impact on both federal and provincial revenues, right as we are facing a possible recession due to Trump’s tariff threats. This decision will reduce federal revenues by $6.7 billion in 2024-2025, and by $19 billion over 5 years.
The tax increase on capital gains would have automatically been applied to most provinces, and so abandoning it will hurt their projected revenues, too.
Quebec runs their own income tax system and can decide whether they want to mirror the change in capital gains inclusion rates at the provincial level. Alberta has an independent system for corporate taxation, so only the individual taxation changes would have applied at the provincial level in Alberta.
Progressive economists have long said that 100% of capital gains should be taxed, so the increase from 50% to 66.7% was already considered a timid move towards increasing tax fairness. Raising the capital gains inclusion rate to 75% would have raised $10 billion in additional revenue for the federal government, and approximately the same amount across provincial governments.
Why tax capital gains?
Capital gains are taxed at a lower rate than dividends and a much lower rate than employment income. Comparing how these forms of income are taxed shows us how extreme the capital gains benefit is for the wealthy.
Like capital gains, dividends are income a person gets because of wealth that they own, not work that they do. Capital gains come from the increase in the value of property at the time of sale. Dividends are a portion of a company’s profit that is passed on to shareholders. Most countries, including the United States, tax capital gains at an equal or higher rate to dividends. Canada is a notable exception.
There is no justification for this favourable tax treatment for capital gains. Capital gains are based only on the increased value of the property. Unlike with dividends, there is no corporate income tax that has already been paid. Those in favour of the lower capital gains inclusion rate will argue that investors should be rewarded for the risk they take in making investments. But research shows that taxing a higher proportion of capital gains does not discourage investment.
In 1966, the Royal Commission on Taxation recommended that income be taxed at the same rate no matter its source. Chair Kenneth Carter said, “a buck is a buck is a buck.” But, by the time tax reform was implemented in 1972, many of the commission’s recommendations had been watered down, and only half the income from capital gains was made taxable. The proportion of capital gains considered taxable increased to 75% by 1990, but the federal Liberal government cut it back to 50% in 2000.
The chart below shows the average capital gains and taxable dividends for individual income groups. It only includes people who had income from these sources. As this data reveals, income from capital gains is even more unequally distributed by income level than income from dividends, which implies that there is active tax planning to take advantage of the more favourable tax rate. Academic research estimates that 88% of the benefit of this loophole goes to the top 1% of income earners.
If Mark Carney fails to keep the Liberals’ promise on improving the capital gains inclusion rate, it will cost federal and provincial governments billions of dollars in revenue and primarily benefit the very rich. This revenue is badly needed for investment in under- funded public services and to support a broad economic transition to make the Canadian economy more self-sufficient.
