Usually, tax news that affects only 0.1% of the population doesn’t make much of a splash in the media. But there are always exceptions, and Ottawa’s announcement about capital gains in the spring was one of them. The measure provoked a deluge of reactions, criticisms, opinions and more or less accurate information that created a wave of panic.
Two months after the increase in the inclusion rate came into effect, economist Jim Stanford hopes to deconstruct myths and re-establish certain facts with his study, which dissects data from the Canada Revenue Agency, the Department of Finance and Statistics Canada.
Since June 24, the capital gains inclusion rate has increased from 50% to 66.7% for the portion exceeding $250,000. Below this amount, the rate remains at 50%. The sale of one’s principal residence is not affected.
The 40-page study comes to several observations and two major conclusions.
The first: “Opponents have made arguments that the tax hurts middle-class Canadians and will lead to job losses that do not match statistical reality.”
The second: “The vast majority of capital gains are received by the top 1.5% of Canadian households, as well as by companies in sectors that target the purchase and resale of assets, not production, innovation and employment.”
Jim Stanford is director of the Centre for Future Work, a labour economics research institute in Vancouver that describes itself as “progressive.” He co-published his analysis with the Institute for Socioeconomic Research and Information (IRIS), which said the capital gains debate was “sorely lacking in data.”
It is difficult to say to what extent we lacked figures to get a fair idea of the impact of the measure, but it is clear that it has been overestimated.
A group of six serious associations, including the Canadian Chamber of Commerce, the Canadian Federation of Independent Business (CFIB) and the Canadian Venture Capital and Private Equity Association, for example wrote to Finance Minister Chrystia Freeland that one in five Canadians “would be directly affected”… before retracting their statement.1. It’s more like 1 in 1000.
We will further excuse the owners of income properties and cottages who have confused the tax rate and the inclusion rate. The expressions are similar, but they do not mean the same thing at all. Couples have deplored the fact that their retirement plan, based on their rental plex, is at risk because of the changes announced by Ottawa.
Given that a retirement that will last several decades should not be compromised by the slightest variation in the value of one’s assets, these fears were surprising. Especially when you look at the figures more closely.
Luc Godbout, holder of the Research Chair in Taxation and Public Finance at the University of Sherbrooke, sent me three scenarios of his own, which are very enlightening.
If a couple who own a triplex and live in it manages to make a profit of $1 million, which is substantial, each person must pay $6,455 to $7,406 more in taxes today than they did at the beginning of June, depending on their marginal tax rate. That’s the equivalent of a trip to Europe, but that amount won’t force anyone to work a few more years than they planned.
As for the couple who gets $1 million for their triplex paid $250,000 (yes, it has already been possible, even in Montreal), they would not suffer any impact from the increase in the inclusion rate. No.
To keep it simple, since the end of June, every $100,000 of capital gains over $250,000 results in an additional tax outlay of about $8,800.
In total, Ottawa expects that 40,000 taxpayers per year will pay slightly more taxes, or 0.13% of the Canadian population. For IRIS, this is only a “timid step towards greater tax justice,” its researcher Colin Pratte told me. As we know, ordinary people – who live solely on their salary – must declare every dollar earned to the tax authorities. They cannot exclude 50% of it.
Meanwhile, more than half (56%) of Canadians with very high incomes (over $250,000 per year) receive a capital gain, much of which escapes tax. Of course, middle-class taxpayers occasionally sell an asset that makes them a lot of money, but statistics show that this is rare and the additional tax is relatively small ($6,800, roughly, for every additional $100,000 of profit over $250,000).
On the issue of innovation, investment and job creation, Jim Stanford notes that the vast majority of corporate capital gains are earned by industries that engage in “the speculative sale of financial and real estate assets” and whose record on job creation is “generally poor.”
The economist concludes that there is no “direct correlation” between the inclusion rate and business activities. In fact, Canada made “its largest and most sustainable technology investments” in the 1980s and 1990s, when the inclusion rate was 66.7% or 75%, he shows.
Luc Godbout also does not believe that innovation will lose interest because of a tax issue, especially since the inclusion rate is never guaranteed. It has changed over the decades. “I have a bit of trouble with that argument. You have four young university graduates who want to start a start-up…I find it very hard to believe that the change in capital gains will discourage them from continuing when they think that they might sell in 20 years.”
The same reasoning applies to workers who invest in real estate for their retirement.
1. Read the CBC article