Dear John,

A few weeks ago, the federal government passed a motion to increase taxes on capital gains.

The issue has – rightfully – stayed in the headlines since.

Here are the facts you need.

What does the change actually mean?

Currently, Canadians who sell capital assets pay taxes on 50% of the gain. With this change, that share will increase to 66.7% for capital gains above $250,000 for individuals.

Finance Minister Chrystia Freeland claims the hike is necessary because it will bring in more than $19 billion of revenue over five years to pay for new spending on housing, national defence, and other programs.

This claim is disingenuous for two reasons.

First, Canadians do not pay capital gains taxes until they sell assets and realize gains. A higher capital gains tax rate gives them an incentive to hold onto their investments, perhaps anticipating that a future government may reduce the rate. Individuals and businesses may not sell their assets as quickly as the government anticipates, so the tax hike ends up generating less revenue than expected.

Second, the government simply does not have a revenue problem. Annual federal revenue is increasing and has grown by more than 66.0% since 2014-15. Before tabling the budget in April, the government was already anticipating annual revenue to significantly increase this year.

But the government has chosen to spend every dime it takes in (and then some!) instead of being disciplined.

The Trudeau government is also claiming that this tax hike will only increase taxes for very wealthy Canadians. Is this true?

No. This is false.

In reality, many Canadians earning modest incomes will pay capital gains taxes.

A recent analysis shows that 50% of taxpayers who claim more than $250,000 of capital gains in a year earned less than $117,592 in normal annual income from 2011 to 2021.

These include individuals with modest annual incomes who own businesses, second homes or stocks, and who may choose to sell those assets once or infrequently in their lifetimes (such as at retirement).

Contrary to the government’s claims, the capital gains tax hike will affect 15.8% of all tax filers!

If that wasn’t all bad enough, this big tax hike is coming at what might be the worst possible time.

Canadians are seeing a historic decline in living standards. And high capital gains taxes discourage the very entrepreneurship and business investment that our country desperately needs to turn this trend around!

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Thank you for your ongoing support.

Sincerely,

Niels Veldhuis
President
The Fraser Institute