As the government delays the planned reductions to Canada’s tax break for capital gains, let’s set the record straight - scrapping the most progressive tax policy Canada has seen in decades would be a huge loss for working Canadians and a huge win for wealthy investors.
To recap, the original proposal decreased the proportion of capital gains that can be acquired tax-free from one half to one third. For individuals, the reduced rate only kicked in after $250,000 in capital gains in a single year. It also offered small business owners an increase in the lifetime capital gains exemption to $1.25 million and a new reduced inclusion rate for entrepreneurs.
The government’s original plan would have raised more money from corporations than from individuals. The biggest players hit by reducing the capital gains tax break are finance, insurance and real estate (FIRE) companies. Over the last 20 years, the FIRE sector has increasingly used capital gains as a path to low-tax profit, booking 66% of the $86.9 billion of corporate capital gains in 2022. Reversing the reduction in tax-free capital gains would put about $7 billion back in the hands of these largely speculative firms over the next five years alone.
Allowing 50% of capital gains to be tax-free has provided large real estate investors an incentive to treat real estate as a commodity for speculation, contributing significantly to the current housing affordability crisis. Increasingly, investors have been buying up existing housing, and “repositioning” it through evictions and renovations to drive up the asset value. In 2023, one residential REIT alone sold over $400 million in residential real estate and distributed over $145 million to its investors in capital gains. At the same time, they increased average rents by 6.2%.
The increase in financialized owners in our rental housing market, and the increase in income through capital gains by those corporate owners, has accelerated since the Liberal government’s decision in 2000 to expand the tax-free portion of capital gains from one quarter to one half. Since then, the FIRE sector’s inflation-adjusted annual profit from capital gains has increased by 700%.
A higher capital gains inclusion rate would discourage further commodification of housing. Instead of lining the pockets of wealthy investors, that $7 billion could be used to build 28,000 units of decommodified affordable housing, one of the most important steps that could be taken to address the roots of the problem.
One might assume that all of that tax-free profit must be translating into economic productivity for Canada; at least that is what the lobbyists pushing for the reversal would like us to believe. But it is simply not true. Buying and selling assets, which is how capital gains are acquired, is not even included in GDP because it does not create new economic value. Capital gains are earned through owning, not working or even building a new factory. This is why there is no evidence that a higher capital gains inclusion rate would hurt Canada’s productivity. But it would certainly promote economic equality and raise funds to invest in vital public services and affordable housing.
As for the impact on individuals, 61.2% of personal capital gains are earned by the highest 1.5% of earners. With the $250,000 annual exemption, only 0.13% of taxpayers will pay any tax at the higher inclusion rate each year. These taxpayers have an average income of $1.4 million. These are not the workers and renters that some will try to convince you will be impacted by this change.
Let’s not let partisan politics stop us from moving forward with a just and progressive tax policy. Shrinking this loophole will benefit workers and renters by making large corporations and wealthy investors pay a fairer share of taxes, discouraging real estate speculation, and funding needed public investment.
Show your support for closing the capital gains loophole here.
