Canadians have been treated to the latest growth-strangling budget of our mushrooming federal government. Aside from the usual profligate Ottawa spending plans, one move has caused justifiable consternation: the capital gains inclusion rate is to be raised from one half to two thirds.
For someone earning over $250,000 per year (the new proposed federal exclusion level), their marginal tax rate on capital gains would go from a low of about 24% in Saskatchewan to 32%; and from a high of 26.5% in British Columbia to 35.5%. Manitoba’s Important: business profits are already taxed; this capital gains tax is on top of it. Corporations are not just big publicly-traded ones, but small businesses: for example, physicians’ practices will be hurt badly.
All this is not merely ‘rich people’s problems’, it really is another socialist panacea that quickly becomes everyone’s problem. Especially when entrepreneurs and venture capitalists, who fund or co-invest with them, have fewer dollars left after taxes to re-invest in new, innovative and growing businesses.
Future ventures will become less appealing, as potential profits from a business sale decline. Institutional investors and affluent individuals, investing in venture capital funds, will have fewer spendable dollars available. While those investors are not directly subject to this tax change, the founding managing entrepreneurs and their companies certainly are; they are their partners.
Trevor Tombe, economics professor at the University of Calgary, determined that the effective marginal tax rate (i.e., on the next dollar) on capital gains would rise from about 27% to 35%: nearing the top marginal 40% income tax rate (varying by province). This would take Canada from being 13th in the Organization of Economic Cooperation and Development rankings (good) to third worst (much higher and worse than in the U.S.).
This is crucial, because the U.S. has the world’s oldest, largest, deepest, broadest, and most diverse venture capital ecosystem. Although California taxes are high for the U.S., Canada’s are higher, and have generous re-investment features to lessen the tax blow on a business sale. It is difficult to put figures to wealth not created over the past ten years, with the much lower productivity growth rate Canada has experienced versus the United States, shows up in Canada’s far lower per capita GDP (~USD$20,800 in 2022) now 27% lower than the USA. It will further depress our currency – allowing foreign investors to pick up Canadian assets, whether businesses, stocks, bonds or real estate at bargain basement prices.
The Council of Canadian Innovators and the Venture Capital and Private Equity Association of Canada warn that this tax hike will harm investment and growth. This budget optimistically projects it will affect just 0.13% of taxpayers to raise just nineteen billion dollars. However, there is substantial evidence that high income individuals change behaviour in response to tax increases – with these types of tax hikes generally yielding less than forecast revenues.
It all seems senseless to harm Canada’s growth prospects. We already have a hard time encouraging investment that could turn stagnation into solid growth and prosperity.
Interestingly, Donald Trump’s election platform includes cutting the U.S. capital gains tax to 15%.
Hopefully this finally sets off some alarm bells in Ottawa.
Ian Madsen is the Senior Policy Analyst at the Frontier Centre for Public Policy
