Economists say the impact of Ottawa’s move to raise the inclusion rate on capital gains taxes will impact financial corporations most of all.
Florence Jean-Jacobs, a principal economist at Desjardins, and Randall Bartlett, a senior director of Canadian economics at Desjardins, said in a report Thursday that the impact of the new measures will be felt differently across industries. Last week Canada’s federal government tabled its 2024 budget, which included intentions to raise the inclusion rate on capital gains taxes from one-half to two-thirds for all gains realized by corporations and trusts. The new rate would only impact individuals with gains above $250,000.
“In the absence of public data on capital gains by sector, the greater the assets (especially financial assets), the greater the risk that some of these industries could be affected by the changed inclusion rate for capital gains,” the report said.
“This is especially the case for financial corporations, which derive a not insignificant share of their profit from capital gains.”
The economists highlighted that generally, non-financial private corporations have a “fairly diverse asset base” with around 55 per cent coming from financial assets, while financial corporation assets are 99 per cent liquid.
“We can therefore assume that the financial sector is likely to be the most impacted by the new measure. This would include the major asset holders in that industry: banks and quasi-banks (37 per cent of assets), mutual funds (16 per cent), and captive financial institutions and money lenders (15 per cent),” the report said.
The report said around 300,000 corporations in Canada declare capital gains, or around 12.6 per cent of businesses. Additionally, the tax changes are believed to generate around $19.4 billion in revenue over the next five years.
According to the economists, the impact across individual financial corporations will depend on the type of assets held and specific exemptions in certain sectors.
“Assets whose capital value can fluctuate, thus potentially yielding capital gains, are more likely to be impacted (debt securities, equity and investment fund shares, for instance),” the report said.
“This contrasts with loans, whose capital value is fixed. Furthermore, pension plans and insurance companies may be subject to certain exceptions, given the nature of the tax treatment of investment income as laid out in the Income Tax Act.”
The economists also questioned the timing of the tax changes, saying it is “hardly the time” to bring in new measures that will hinder business investment in the country. While revenues are likely to increase due to the new tax measures, the report highlighted that it could “come at an economic cost.”
“Canada has a productivity problem, and it’s unclear how reducing Canada’s relative tax advantage will reverse this slide, as investment in innovation is urgently needed,” the economists said.