Capital gains tax hike will hurt the middle class.
Almost 1.25 million Canadians will have to pay it at least once during their taxpaying lives.
Some people never seem to learn that “history repeats itself, first as tragedy and second as farce,” as Marx wrote. That certainly applies to the Prime Minister Justin Trudeau government’s insatiable Marxian appetite for making “the rich pay a little bit more,” exercised most recently in its budget proposal to hike capital gains taxes.
Back in 2017 Trudeau discovered — by badly burning his fingers — that putting new taxes on private corporations hurt not just “the rich” but also many middle-class owners of small businesses. The pushback was enormous, leading to a retraction of several proposals. Now history is repeating itself. The budget claims the capital gains hike only affects “the rich.” That is plain wrong.
The budget raises the share of capital gains subject to income tax from one-half to two-thirds as of June 25. For individuals, the higher rate only applies to gains in excess of $250,000. For corporations and trusts, however, it applies to any gain. The budget forecasts that in 2025 only 44,000 individual tax filers (0.13 per cent of all filers) will be affected, while 307,000 corporations will be more heavily taxed.
But a snapshot of the number of filers affected in a single year gives a false impression of how many Canadians will be affected over their taxpaying lives. For that you need a movie: all the annual snapshots riffled in sequence. Capital gains are “lumpy.” Most people dispose of assets only occasionally, not every year. Selling a vacation home, a small business, farmland or other important assets is often a once-in-a-lifetime event.
Statistics Canada data that follow individuals from 2011 to 2021 confirm this. Canadians earn large capital gains only infrequently. Over these years an annual average of 44,664 tax filers reported capital gains in excess of $250,000, almost identical to the budget’s forecast of 44,000 for next year. But they were not the same 44,000 people every year: far from it. In fact, over the 11 years, 66.3 per cent of people who experienced gains this large at least once experienced them only once. Another 15.4 per cent experienced them only twice.
Only 4.2 per cent of tax filers who experienced gains over $250,000 at least once in these 11 years reported them six or more times. That’s about 1,850 people. Among them, no doubt, is the $800,000-a-year investment banker who features so prominently in the prime minister’s video about the tax hike. But over 11 years most of the people who fell in this group were not investment bankers.
With a bit of math, I estimate that 1.25 million individuals — not just 44,000 — will make a capital gain greater than $250,000 at some time in their taxpaying life. Many of these people will have relatively modest incomes and only earn extraordinary capital gains at retirement or death. And many of these gains will be paper gains, reflecting asset price increases driven by inflation, not real growth.
But that’s not the whole story. Especially at the corporate level, the capital gains hike will be capitalized in lower equity values, which will hurt anyone holding stocks, whatever their income. A recent European paper on mergers and acquisitions found that corporate capital gains taxes reduced acquisitions by $1.1 billion a year in Canada. This, in turn, reduces equity values, with annual losses of $300 million.
The budget claimed — wrongly — that the capital gains tax increase won’t hurt equity values or business investment. Leaving aside small business and venture capital, which will surely be affected, equity values in large Canadian corporations are also bound to fall at least to some extent. Corporate capital gains are roughly $30 billion a year — about eight per cent of corporate taxable income. An increase in corporate capital gains taxes will result in lower profits available for dividend distributions or reinvestment.
How many Canadian investors would be affected by higher capital gains taxes at both the personal and corporate level? In 2021, 4.74 million tax filers (15.7 per cent) received distributed profits from Canadian corporations. Of those, 69 per cent — 3.29 million — had incomes below $100,000. The increase in corporate capital gains tax is going to hurt many Canadians investors with middle or modest incomes.
Taxing millions of middle-class Canadians is very different from taxing the superrich. In today’s world, unlike in Marx’s 19th century, capital is widely owned. Expect the pushback to grow, just as in 2017. History does repeat itself, as the Liberals seem not to have learned.