If the Trudeau government had decided to raise the capital gains inclusion rate earlier in its mandate, only a tiny proportion of Canadian taxpayers would have been affected, data obtained by The Duty.
Just 22,850 people in Canada reported a capital gain of more than $250,000 in 2015, the year Prime Minister Justin Trudeau took office. In 2021, that fortune was reported in a record 81,530 tax returns. That number dropped the following year to 61,550 taxpayers.
Year after year for the past decade, between 0.1% and 0.3% of Canada’s approximately 30 million taxpayers have reached the capital gains income threshold at which the Trudeau government has decided to increase the tax burden in 2024.
Since June 25, individuals who declare the most capital gains must submit two-thirds of them to tax. The threshold was set at $250,000 of this income annually. Until then, half of capital gains could be pocketed tax-free, a rate that still applies for the first quarter of a million. Capital gains are made when selling assets or shares that have increased in value, for example.
“I find that in the way the measure was designed, the government really made an effort to target the negative effect on the wealthiest,” says Luc Godbout, holder of the Research Chair in Taxation and Public Finance at the University of Sherbrooke.
The tax expert was disappointed that he did not have access to historical data, and had to take federal officials’ projections at face value, which estimated that 40,000 taxpayers would be affected by the flagship measure of the last federal budget. The data obtained by The Duty “seem entirely consistent” with the ministry’s claims.
Ideological debate
These estimates were at the heart of a political debate that animated the House of Commons before the summer break. The elected members of the Conservative Party of Canada (CPC), the only ones to have opposed the increase in the capital gains inclusion rate, alleged that a large segment of the Canadian population would be affected by the tax increase, including farmers, welders, carpenters, restaurateurs, fishermen or electricians.
After voting for the measure, the Bloc Québécois then opposed taxing small apartment building owners more. These owners could once in their life declare more than $250,000 in capital gains when they sell their building, according to calculations made by the Corporation des propriétaire immobiliers du Québec (CORPIQ). These calculations were qualified by the experts consulted by The Duty.
An ideological fault line also separates researchers from two recent, partially contradictory studies on the subject. One, co-authored by the Institute for Socio-Economic Research and Information (IRIS) and the Center for Future Work (CFW), published Monday, concludes that it is the wealthiest in society who primarily benefit from capital gains. Increasing the capital gains inclusion rate would even benefit the middle class, according to the authors.
Another lobby group, the Montreal Economic Institute, disputes that conclusion, citing economist Jack Mintz’s work that suggests up to 1.26 million Canadians will declare a capital gain large enough at least once in their lives to be affected by the increase. Corporations also see their capital gains taxed at 66.7%.
Make some people pay
Behavioural tax expert André Lareau agrees that cottagers or those who bought apartment buildings many years ago could have to pay more taxes. However, there are numerous exemptions that allow most small business investors and farmers to avoid the increase, he believes.
“It’s a question of sharing the burden of the state. The state is like a cooperative. If you have a little more in your pockets, well you contribute more,” explains the associate professor at the Faculty of Law at Université Laval.
“When we refrain from taxing capital gains, we are forced to tax all other taxpayers at a higher rate,” adds Luc Godbout.
The Department of Finance Canada acknowledges that the sale of real estate accounts for a significant portion of capital gains. Its experts estimate that the significant increase in this income reported in 2021 and 2022 is attributable to the fact that “many Canadians were buying and selling second homes during the pandemic.” The sale of a principal residence is not subject to capital gains tax.
Ottawa predicts a return to the historical average of capital gains in 2025. The 1er In August, the Parliamentary Budget Officer (PBO) released an analysis that revised downward the total amount the federal government can expect to receive by increasing the capital gains inclusion rate, from $19.3 billion to $17.4 billion over five years.
These kinds of estimates are very complicated to establish, since they come down to guessing at the behavior of wealthy taxpayers who implement tax planning strategies to reduce their tax bill. It took the federal Department of Finance more than a month to compile the historical capital gains data requested by The Duty in June.