Policy & Positions Manual
National Issues - Finance
Elimination of Canada’s Capital Gains Tax (2010)
Statement of Problem
Canada’s Capital Gains Tax represents less than one percent of the country’s total tax revenue and has been described by leading economists as being of marginal worth.(1) To the businesses that pay the tax, the levy represents a huge burden that has a stultifying affect on their capacity to innovate and expand.
Our partners in NAFTA, and indeed our competitors around the world, have substantially lower capital gains taxes. Countries such as Germany, Turkey, Mexico, New Zealand, Belgium and others, have a zero capital gains tax.(2) By comparison, Canadian business shoulders an unfair tax that frustrates its ability to unlock the capital needed to update manufacturing plants, invest in new technology and keep pace in a competitive global environment.
According to the National Angel Corporation of Toronto in their report dated October 12, 2004, $1 invested in an SME at early stages creates $10 of economic activity, and a further $5 of later stage investment. Thus, a $1 investment can lead to $50 of economic activity. According to the autumn 2000 Stats Canada Perspectives study for the year 1997, the latest date such comparisons were reported, taxes were 36.8% of GDP. This would mean that $50 of economic activity would generate $18.40 of tax.
Details of the Problem
In 2005/2006, the Federal and Provincial Governments collected approximately $443.1 billion in tax revenue. The bulk of the revenue came from personal income tax (37.2%), corporate income tax (11.1%) and sales income tax (24.2%). Additional sources of revenue accounted for 26.7 % of the country’s total tax revenue. The Capital Gains Tax represented just .08% of that amount, or approximately $3.5 billion of the country’s total tax revenue.
Numerous economists, including Alan Greenspan, the former chairman of the Federal Reserve in the US,(3) as well as several leading Canadian economic thinkers have derided capital gains as detrimental to entrepreneurs, business and the communities that depend on businesses to create jobs.
Taxpayers who benefit from these tax reductions will usually do 1 of 2 things. They will spend the savings or invest them. Using a normal multiplier of between 2 and 3, and the OECD percentage of tax generated per dollar of economic activity of 36%, the revenue to government should be about the same. However, if the funds are invested, studies indicate that a dollar of new investment generates $50 dollars of economic activity, which using the same OECD statistics would generate about $18 of tax revenue.
A study completed by Grant Thornton concerning the BC Investment program found that a dollar of tax credit from the system generated $1.30 of payroll, income and sales tax revenue. This excludes federal taxes. Grant Thornton found the payback period to be 2.8 years. A dollar tax credit from this program is similar to a dollar of reduced tax from capital gains.
In 2006, the Federal Government committed to relieving Canadian businesses of some of that tax burden. It was a prescient plan that might have served to offset some of the difficulties currently being experienced by small and medium sized business in the current tight lending market. The reductions however, were never achieved.
Capital gains, or losses, occur when the value of the asset at the time of sale differs from its value at the time of purchase.(4) In Canada, 50 percent of any capital gain, with exception of principle residences, is subject to the Capital Gains tax. Canada does not have a separate Capital Gains tax. Any increased in the value of an asset are considered income and the tax amount is calculated based the taxpayer’s marginal rate of income.
The provincial capital gains tax varies between provinces, however the western provinces have the lowest combined capital gains tax while Quebec, Nova Scotia and Newfoundland and Labrador have the highest rates. Generally speaking, as a nation Canada has a high capital gains tax when compared to other countries in the OECD. Canada in fact ranks as having the 9th highest capital gains tax rate.
The Capital Gains Tax was first introduced by the Liberal government in 1971, and there is wide spread agreement among economists that is represents an ‘all pain-no gain’ tax. For example, it discourages business from reallocating capital. Business owners are more likely to hang on to outdated investments even if better opportunities arise. Economists call this the locked-in effect.
Since business still must find ways to raise money, and can’t access the gains they have made without being taxed, they are forced to find other ways to raise cash. This means businesses must incur borrowing costs in order to make new investments in their businesses, further stressing their capital.
The Capital Gains Tax also has a negative impact on entrepreneurship. For example, start up businesses searching for high quality talent may offer shares in the business or a partnership agreement. However, when they wish to withdraw that investment they are taxed.
There is a mound of academic research that indicates capital gains taxes run counter to entrepreneurship and to the creative, risking-taking and innovative environment that strengthens both economies and communities. It is argued that by eliminating the capital gains tax, the resulting economic impact of re-allocation of capital will more than offset the .08% reduction in tax revenue.(5)
THE CHAMBER RECOMMENDS
That the Federal Government eliminate the capital gains tax.
Footnotes
1 - Niels Velduis, Keith Godin, Jason Clemens. The Economic Costs of Capital Gains Taxes. Fraser Institute. Studies in Entrepreneurship Markets. Number 4/ February 2007 |
2 - Newt Gingrich and Emily Renwick. Journal of the American Enterprise Institute. August 13 2009. |
3 - Remarks by Chairman Alan Greenspan on Current Monetary Policy. Haskins Partners Dinner at the Stern School of Business. New York University. May, 1997. |
4 - Canada Revenue Agency (2010). Calculating and Reporting your Capital Gains and Losses. |
