Written by 11:38 PM Government and Regulation Views: 2,468

Capital gains tax hike could cost 414,000 jobs and slash GDP, economist warns

Alarming new testimony warns that Canada’s recent increase to the capital gains inclusion rate could lead to the loss of more than 414,000 jobs and a massive $90 billion hit to the country’s economy.

Capital gains hit to Canadian economy

Speaking before the Standing Committee on Finance this week, economist Jack Mintz argued that the increase in the capital gains inclusion rate announced earlier this year could have far-reaching consequences for employment, investment, and Canada’s already struggling economic growth.

Dr. Jack Mintz

As part of the federal Budget 2024, the capital gains inclusion rate was increased from 50% to 66.7% for the sale of secondary homes and other assets. This applies to annual gains above $250,000 for individuals and to all gains for corporations and trusts as of June 25, 2024.

The increase aims to raise additional revenue from wealthier Canadians who sell secondary properties or other assets, but concerns have grown about its potential impact on middle-income Canadians, especially those who make significant gains only once in their lives. For example, the sale of a family cottage or a business could push an otherwise modest-income individual into a much higher tax bracket, resulting in a larger-than-expected tax bill.

While the government suggested that only 0.13% of taxpayers, or 40,000 individuals, would be impacted by this change, Mintz argues that the real figure is much higher.

Government projections for impact of capital gains tax increase in 2025

“Far more Canadians will be affected by the tax changes than the government seem to anticipate,” said Mintz, the President’s Fellow of the School of Public Policy at the University of Calgary. “I estimate that 22,088 unique Canadian taxpayers per year, or 1.26 million Canadians on a lifetime basis, or 4.3% of taxpayers, will be affected by the increase in the capital gains tax on the individuals, half of whom earn less than $117,000 per year.

Not only has the government underestimated the impact on individual Canadians, but it has also overlooked the potential damage to business investment, Mintz emphasized. He explained that the higher capital gains inclusion rate will discourage investment by raising the cost of capital for businesses.

“Based on Statistics Canada data, I estimate the Canadian households own 35.5% of listed company shares in Canada,” Mintz said.

This reflects a phenomenon known as home bias, where investors prefer to put their money into domestic companies they are more familiar with, rather than taking the risk of investing abroad. Mintz explained that Canadian investors tend to hold a large portion of their equity in local firms, a behaviour that helps domestic businesses maintain a stable capital base. However, by raising capital gains taxes, the government risks reducing the attractiveness of Canadian investments, which could lower equity values and raise the cost of capital for Canadian companies.

“Under home bias, capital gains taxes have been shown to suppress equity values and raise the cost of equity finance investment for Canadian companies,” he added.

Tax change could increase unemployment and slash GDP

Mintz also warned of serious economic risks to the overall Canadian economy as a result of the changes introduced by the federal government.

He argues that the increase to the capital gains inclusion rate will increase unemployment in Canada from 1.4 to 1.8 million workers while reducing national GDP by roughly $90 billion.

“While the impact of the capital gains tax increase is not catastrophic, it is substantial,” he told the committee. “It is another hit on Canada’s productivity and economic growth on top of other tax increases and more important regulatory obstacles to investment.”

Not only is the economic impact of concern, but Mintz argues it couldn’t come at a worse time for the Canadian economy, with per capita GDP currently lower than it was during the Great Depression.

“The timing is bad,” Mintz said, suggesting that it’s not advisable to implement such tax reforms at a time when there’s been several years of negative real per-capital GDP growth. “I think that’s a very serious issue.”

While Mintz acknowledged the need for tax code changes, he argued that broader tax reform would have been a more effective approach, given the complexities surrounding capital gains taxation.

Visited 2,468 times, 2 visit(s) today

Last modified: October 24, 2024

Steve Huebl is a graduate of Ryerson University's School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.

Close