A new report from the C.D. Howe Institute says the proposed increase in the capital gains tax rate would impact people and companies more broadly than the government estimates and argues it should be scrapped amid political uncertainty.
The report, released Thursday, was authored by Jack Mintz, a senior fellow at the C.D. Howe Institute and the president’s fellow at the school of public policy at the University of Calgary. Mintz’s report comes after the federal government stated Tuesday the Canada Revenue Agency (CRA) would continue to act on changes to Canada’s capital gains tax system proposed in the federal budget last year, despite the fact that the changes have not been passed in Parliament, which has been prorogued until March 24.
“Far more Canadians would be affected by the tax change than the government seemed to anticipate….I estimate that 22,088 unique Canadians per year, or 1.26 million Canadians on a lifetime basis (4.3 per cent of taxpayers) would be affected by the increase in the capital gains tax on individuals, half of whom earn less than $117,000 per year,” the report reads.
Mintz’s estimate stands in contrast to figures from the federal government that say the change would impact 40,000 individuals, or 0.13 per cent in a given year, as well as 307,000 Canadian companies.
“Perhaps, the planned measure to increase the capital gains exclusion rate should never see the light of day when Parliament resumes after March 24, nor be revived thereafter by a new government,” Mintz said in the report.
The plan to amend the Income Tax Act to raise the inclusion rate on capital gains taxes now faces uncertainty, the report said, following Prime Minister Justin Trudeau’s move to prorogue Parliament.
Last September, the report highlighted that the government introduced the changes in a Ways and Means motion, but that legislation had not been introduced.
As a result, the report said Canadians cannot be sure that the amendments to the capital gains tax will be passed “or simply be withdrawn altogether by a newly elected government.”
“Meanwhile, tax planners and the affected individuals and corporations must await the outcome, even though the Canada Revenue Agency began administering the tax on June 25, 2024, after it was announced in the spring budget,” the report said.
“At this time, taxpayers could be assessed interest and penalties if they do not comply with the proposed law. If the law is never passed, taxpayers will have to claim refunds.”
Economic impact
According to the report, the proposed increase to the capital gains tax would have wide reaching economic impacts, and it would be better to evaluate the role of capital gains taxes as part of a more comprehensive tax reform.
“This e-brief estimates that Canada’s capital stock would decrease by $127 billion; employment would decline by 414,000 jobs; GDP (gross domestic product) would fall by nearly $90 billion; and real per-capita GDP would decrease by three per cent with most of the adjustment within five years,” Mintz said.
Additionally, the report said the changes would “discourage business investment and employment,” despite claims by the government in its April budget that it would not.
‘Provide certainty’
Given the current political situation, some say that there is now uncertainty regarding capital gains tax rules.
In a statement to BNNBloomberg.ca Thursday, Jessica Brandon-Jepp, senior director of fiscal and financial services policy at the Canadian Chamber of Commerce, said that some Canadians and businesses remain acutely concerned about how the measure will be enforced after the prorogation of Parliament.
“It is inappropriate—and, by our analysis, unprecedented—for a government to continue to implement a tax change solely based on a ‘Ways and Means’ motion, with the clear threat of a non-confidence motion and no clear timeline to table legislation,” Brandon-Jepp said.
“This increased uncertainty compounds the impact of this tax increase in driving away new investment and entrepreneurship from our country at the exact moment we need it most.”
Given the likelihood that the tax increase may not be enacted in 2025, she called on the government to “provide certainty” and “direct the CRA not to enforce this measure until after an election, if at all.”
Starlight Capital CEO and CIO Dennis Mitchell said in an interview with BNN Bloomberg Tuesday that the uncertainty is particularly impacting asset management companies like Starlight as well as financial service firms, since they manage capital and there are tax ramifications each year.
“What do we do with capital gains that are realized with special distributions that have to be paid out? What do we do with all of that between now and the end of February?” he asked.
“Decisions have to be made now based on our anticipation of what the future government is going to look like and what their legislative priorities are going to be.”
In a statement to BNNBloomberg.ca Wednesday, Paul Carenza, a tax specialist and partner at Gowling WLG, said that although it is common for the CRA to administer taxes on the guidance from draft legislation, “the circumstances surrounding the prorogation of Parliament are arguably different.”
“That said, the conservative course of action may be for taxpayers to file their tax returns based on the draft legislation’s increased capital gains inclusion rate and, if the draft legislation is ultimately not passed into law, to seek a refund of the increased tax paid,” he said.