Contentious changes to how capital gains are taxed in Canada will bring in billions less in revenue for the government than Ottawa was expecting when it tabled the 2024 federal budget, according to the Parliamentary Budget Officer.
The PBO on Thursday tabled a probe of Liberal measures to hike the inclusion rate on capital gains taxes.
The fiscal watchdog expects that, over the five-year planning horizon in the budget, the government will yield an extra $17.4 billion in tax revenues thanks to the changes.
That’s below the $19.4 billion in revenues the Liberals had forecast in the budget in April.
The changes, which went into effect June 25, saw the inclusion rate on capital gains rise to two-thirds up from one-half for individuals making more than $250,000 annually, as well as for all gains realized by corporations and trusts.
Capital gains are realized from the sale of an asset like a stock or property. Canadians’ primary residences remain exempt from capital gains taxes when sold, but secondary properties like cottages are included.
The changes to capital gains taxes were billed as necessary to pay for spending elsewhere in the 2024 budget while bringing in enough revenue to maintain the Liberals’ fiscal anchors.
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The so-called capital gains advantage has been cited as a way for wealthy Canadians to avoid paying as much on their income taxes. The Liberals said in the budget that only 0.13 per cent of Canadians earn more than $250,000 in capital gains each year.
But the changes were criticized by some business leaders and professional groups, arguing the changes would discourage business investment and affect tax planning strategies for groups like doctors.
Finance Minister and Deputy Prime Minister Chrystia Freeland defended changes to capital gains as part of the Liberal bid to improve “tax fairness,” arguing it was “really fair” to ask the wealthiest to pay more to fund investments in housing and other spending properties.
The capital gains issue became more contentious when the Liberals removed the measure from the budget legislation, forcing a separate vote on the issue in the House of Commons. The Conservatives voted against the measure, lambasting the Liberal approach to government taxes and spending, but it passed thanks to NDP support.
With a 10-week window between when the changes were announced and when the new higher inclusion rate would take effect, the PBO said it included projections for those who would realize capital gains ahead of the new date to take advantage of the old 50 per cent rates.
It projected that corporations in particular would rush to dispose of assets because all of their proceeds would fall under the higher inclusion rate after June 25, while individuals might take a longer horizon to stretch out their capital gains to skirt the annual $250,000 bar.
The PBO noted that capital gains tend to be more “volatile” than other sources of income — they’re closely tied to market dynamics, economic cycles and changes in tax policy — and are therefore difficult to project.
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