The wealthy have all sorts of tools at their disposal to protect and grow their wealth at the expense of the rest of us, including the tax system. A few months ago, Canada’s Liberal government announced a modest change that would try to rebalance the scales a bit, raising the country’s capital gains inclusion rate from 50 percent to 67 percent. Predictably, the rich went nuts and warned it would tear the country apart.
In an interview with David Moscrop, Jim Stanford, economist and director of the Centre for Future Work, discusses his new report, which shows how preexisting capital gains policies benefit the wealthy and exacerbate inequality. He also explains that the fearmongering surrounding the change was, at best, misguided and suggests further reforms that would level the playing field even more.
Rich Rage Over Tax Tweak
David Moscrop
What change was made to capital gains taxation in Canada?
Jim Stanford
In its 2024 budget, the federal government announced a change in what’s called the “inclusion rate” for capital gains. Capital gains are profits that are made by selling something — an asset of some kind, which could be a financial asset or property or fine art — for more than what was originally paid.
In the tax system, this kind of income is called a capital gain, and it has always enjoyed preferential tax treatment. In Canada, only a portion of a capital gain needs to be reported as income for tax purposes, which is determined by the inclusion rate.
For anyone who works for a living, that sounds weird. We must report all of our wages on our income tax, but if someone profits from selling assets, they only have to declare a portion of that profit. The percentage they must declare is the inclusion rate.
For the last twenty years or so, the inclusion rate in Canada has been 50 percent. That means financial traders or property speculators only have to declare half of their capital gains on their income tax. The federal government, under Finance Minister Chrystia Freeland, has reformed that now and raised the inclusion rate to 67 percent. This means they must declare two-thirds of those capital gains on their income tax. That’s still a lot less than 100 percent, which is what most Canadians have to do with their income, whether it comes from wages or pensions or income support or even self-employment.
But it’s been enough of a change to get the whole financial industry and conservatives pulling their hair out. And so we’ve had a big, loud campaign against this reform coming from those circles.
David Moscrop
Who is earning the capital gains?
Jim Stanford
The two-thirds inclusion rate will apply to corporations who make capital gains and to some individuals, but not many.
To be subject to this higher inclusion rate, an individual must have declared over $250,000 in capital gains over one year. The government has targeted this measure at individuals and corporations, but only individuals with really big capital gains, meaning only a small share of the population will be affected.
So who is this group? In our report, I looked at the distribution of capital gains across different income categories using the Canada Revenue Agency’s data set on income tax returns. The most recent data is for 2021. I found that 61 percent of all reported capital gains that year were claimed by the top 1.5 percent of Canadians. This is the group that consists of those with over $250,000 in annual income from any source. Although they represent just 1.5 percent of all Canadian tax filers, they received 61 percent of all capital gains.
No other form of income is more concentrated at the top end than capital gains, even other types of investment income. And any investment income is going to be flowing disproportionately to people with wealth. That’s what investment income is. But the particular nature of capital gains and how they’re taxed — and this especially sweet loophole — means that the concentration of capital gains at the very, very top end of our society is incredible.
This is the group that’s going to pay more under the new inclusion rate. They’re rich and they have loud voices and they have powerful allies and they have a lot of money. This is why we’re hearing so much about this measure, which really won’t affect many Canadians at all.
The Great Tax Swindle
David Moscrop
You point out that wealth is concentrated among those who tend to earn capital gains. It’s not a surprise that tax law often favors the wealthy and the powerful. What are the broader implications of treating capital gains differently than ordinary income?
Jim Stanford
Well, from the perspective of the conventional economics and tax world — people who accept all of these arguments about free-flowing capital and how efficient markets are and how business entrepreneurship is the leading force in society — you get all kinds of mumbo jumbo arguments about why we must treat income from investments more favorably than income from any other source, including working for a living. So you’ll get all kinds of stories about how it’s an incentive to invest, or it’s an incentive to take risks. You often hear this sort of thing — as if taking risks is somehow something we want people to do more of. I mean, I taught my children not to take risks. I taught them to look both ways before they cross the street. This mythology that taking risks in and of itself is a productive activity is unbelievable.
Another argument is that since investors have already paid tax on the money they initially invested, they shouldn’t have to pay tax on the profits from those investments, which is also ridiculous. While some may have paid tax on their initial investment, that’s not the case if they inherited it or if it was a reinvested capital gain from another investment, which is often what happens. Regardless, whether you paid already or not, the profit from that investment is new income, so you should pay tax on it just like everybody else does.
Another common stereotype is that favorable treatment of capital gains is necessary if we’re going to have business investment in machinery and equipment and technology and research and development — wrapping the whole thing up in a high-tech cloak. And that’s not true either. Our report looked at the history of Canada’s actual investments in machinery and equipment and technology and research, and there’s no correlation at all to capital gains. Capital gains taxes don’t discourage running a business.
So what is the real effect of this incredibly favorable treatment? It widens inequality. Investment income already flows disproportionately to the top end of society, and this incredibly sweet tax arrangement reinforces that concentration.
The greatest irony is that, due to Canada’s marginal tax rate system, those at the very top — the richest 1.5 percent, who claim 61 percent of all capital gains — get a bigger kickback from this preferential tax regime than people at the bottom.
Because they pay a higher marginal tax in the first place, typically over 50 percent when combining federal and provincial taxes, reducing their taxable capital gains saves them 50 cents on every dollar excluded. In contrast, someone at the lower income threshold might save only 15 cents on each dollar of excluded capital gains.
So the rich not only receive most of the capital gains but also enjoy a bigger rate of effective tax subsidy for each dollar of those capital gains. This double-barreled effect exacerbates income inequality, as our report shows that the concentration of capital gains at the top end significantly widens income inequality ratios and, on an after-tax basis, it’s even worse due to that double-barreled effect.
In Search of an Ideal Tax Rate
David Moscrop
Say we had two goals: to decrease inequality, and to fund social programs and rebuild the welfare state. What would an ideal inclusion rate be for capital gains?
Jim Stanford
I believe that a dollar should be treated as a dollar regardless of where it came from in the tax system. And that was the core finding of the famous Carter Commission back in the 1960s, which led to all kinds of tax reforms, including the introduction of the first-ever capital gains tax in Canada in 1972.
The ideal inclusion rate would be 100 percent, just like every other form of income that we have. Now this raises some issues about how corporate dividends or corporate payouts, especially those structed through trusts, are taxed — where the corporation pays some tax at first and then the individual pays again. But there are other ways to solve that problem.
There are also far more effective ways to finance investments in technology, machinery, equipment, and research and development. The capital gains system costs the federal government over $30 billion a year in foregone revenue.
By reallocating just a tenth of that amount into targeted direct subsidies for different research activities in any industry — whether it’s clean energy or generic pharmaceuticals or any other high-tech sectors — we could achieve much greater results than through the existing tax incentives, most of which have no connection whatsoever to the investments being made.
David Moscrop is a writer and political commentator. He hosts the podcast Open to Debate and is the author of Too Dumb For Democracy? Why We Make Bad Political Decisions and How We Can Make Better Ones.
