The following text is the speaking notes used by Canadian Centre for Policy Alternatives—British Columbia researcher Marc Lee in a Sept. 17 presentation to the House of Commons Finance Committee. In it, Lee argues in favour of the federal government's move to increase the inclusion rate on capital gains is necessary for a fairer tax system.
Thank you for the invitation to speak to the committee. I support the budget’s move to increase the inclusion rate for capital gains to 66.7 per cent for gains larger than $250,000.
I’d like to make five points.
First, in my view, the inequality of income and wealth in Canada is too high. A fair and decent society should have neither extreme of obscene wealth nor desperate poverty.
Progressive income taxation, in particular taxation of the wealthiest, is a central means by which we can reduce inequality, provide adequate shared public infrastructure and services, and create opportunities for all to live a decent life.
This is reflected in the tax principle of “vertical equity”—that those with greater ability to pay should pay a greater share of their income in taxes. And this fairness by design is best implemented at the federal level.
Second, the unequal tax treatment of capital and labour income exacerbates inequality and is part of the problem.
My recent tax incidence study with DT Cochrane, Canada’s Shift to a More Regressive Tax System, found that federal taxes are progressive up to the middle of the distribution, then flatten out, and are regressive at the top. That is, effective tax rates fall as income rises: someone in the ninth income decile paid an average of 21.8 per cent in federal taxes, this fell to 14.2 per cent for the top one per cent of earners.
Our study points to the role of non-taxed and lightly taxed sources of income—capital gains in particular—for regressive tax incidence at the top of the income distribution.
A fair tax system should reflect an individual’s actual command over resources. The tax principle of "horizontal equity" is that two people with the same amount of income pay the same rate of tax regardless of the source of that income. The Carter Royal Commission on Taxation in the late 1960s captured this notion with the phrase “a buck is a buck.”
Third, preferential treatment of capital gains is costly to government. Federal tax expenditures for the partial inclusion of capital gains were estimated at $23 billion in 2024 by Finance Canada, plus another $2 billion for the lifetime capital gains exemption.
A range of other provisions already address particular circumstances for farms/fishing properties and small business shares, such as the increased lifetime capital gains exemption of $1.25 million and reserve provision for spreading gains over multiple years when transferring to a child.
While modest, the capital gains change is expected to raise $18 billion over the next five years.
Fourth, the capital gains change is very narrowly targeted. Capital gains in excess of $250,000 in a tax year are highly concentrated at the very top of the income distribution. The higher marginal rate will be paid by only the 40,000 or so richest individuals.
Even with the 2024 change, the income from buying and selling assets will be taxed less than from working.
Fifth, the benefits assumed from privileging capital gains are vastly overstated. Preferential treatment of capital income has been justified as providing a stronger incentive for investment.
Economists think of investment in terms of increases in the capital stock of machinery and equipment or buildings, whereas capital gains are largely on speculative holdings of real estate and financial assets. Investment tax credits would be a better way of incentivizing real investment.
If anything, Canada’s stronger periods of economic growth and productivity growth were during periods when the inclusion rate was higher than the current 50 per cent.
To the extent that the additional taxation of capital income provides revenues that are spent on public services, investments and jobs, as is the current case, this will be pro-growth.
A fair tax system should be progressive and broad in its consideration of taxable income. Raising the inclusion rate for capital gains above $250,000 is a small step towards a more fair tax system. It increases the progressivity and fairness of the federal income tax system, while only affecting a small handful of wealthy individuals. If anything, the Government of Canada could go further.
