Canada’s capital gains taxes hurt economy, reform could liberate ‘locked-in’ capital

VANCOUVER—Capital gains taxes stifle investment, discourage entrepreneurship, and damage Canada’s economy, notes a new essay released today by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.

“While capital gains taxes raise a small amount of revenues for government, they do so at considerable economic cost by reducing returns on investment, which discourages private sector investment and entrepreneurship—two things we need more of,” said Charles Lammam, associate director of tax and fiscal policy at the Fraser Institute, which released The Economic Costs of Capital Gains Taxes in Canada, part of a collection of essays on capital gains taxation. Capital gains taxes are imposed on gains from the sale of assets. Consequently, notes the essay, investors may retain older investments, even if more profitable and productive opportunities are available, because of the requirement to pay capital gains taxes. Economists call this the “lock-in” effect. “New business ventures drive productivity and employment growth, and if more locked-in capital were liberated, it could help boost the economy,” Lammam said.

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But if Ottawa reforms the capital gains tax regime, and possibly cuts rates, won’t revenues suffer? The essay notes that capital gains tax revenue represents only 2.3 per cent of federal income tax revenue and a mere 1.1 per cent of the federal government’s overall revenue. “It’s hard to justify the current level of capital gains taxes, considering the harmful economic costs they impose on Canadians and the relatively small amount of revenue they generate,” Lammam said. Among the 34 countries in the OECD (Organisation for Economic Co-operation and Development), Canada has the 14th highest capital gains tax rates. Incidentally, 11 OECD countries impose no tax on capital gains. The Fraser Institute will release a set of essays by internationally-recognized experts next week explaining capital gains tax reform in other countries and the options for reform in Canada. “By reforming the capital gains tax regime, Canada could get a big bang for its buck by providing tax relief that encourages growth while having a minimal effect on revenue,” Lammam said. “If governments want to encourage growth without unduly reducing revenues, they should consider reforming our current capital gains tax regime.” Charles Lammam, Associate Director of Tax and Fiscal Policy, charles.lammam@fraserinstitute.org, Jason Clemens, Executive Vice-President, Fraser Institute, jason.clemens@fraserinstitute.org