Reducing capital gains taxes would encourage investment and grow Canada’s economy

VANCOUVER—With a federal budget surplus looming, a new book released today by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank, spotlights three possible options for reducing capital gains taxes in Canada.

“As the debate about how to prioritize the budget surplus continues, evidence from around the world clearly shows that capital gains tax reform in Canada could provide considerable economic bang for the buck,” said Jason Clemens, Fraser Institute executive vice-president and co-editor of Capital Gains Tax Reform in Canada: Lessons from Abroad. Capital gains taxes are imposed on gains from the sale of assets. Canadians currently face the 14th highest capital gains tax rate among the 34 OECD countries. High taxes on capital discourage investment and entrepreneurship. Since Canada is a small economy competing for investment, it needs a competitive tax regime. The book features a series of essays from internationally-recognized scholars, detailing the experiences of Hong Kong, New Zealand, Switzerland and the United States, and providing reform options for Canada, which include:

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Capital gains rollover

Capital gains taxes cause investors to retain older investments even if more profitable and productive opportunities become available. Economists call this the “lock-in effect,” which discourages investment in new business ventures. The first reform option is the introduction of a “rollover mechanism” for capital gains, which some countries such as the United States have experimented with, as noted in an essay by Stephen J. Entin, former deputy assistant secretary at the U.S. Department of the Treasury. Rollovers allow for a tax deferral if the gains (on the sale of an asset) are reinvested within a certain timeframe, perhaps six months, thus mitigating the lock-in effect. In 2006, the Canadian federal government discussed such a change but it was never implemented.

Eliminate the capital gains tax

In Canada, capital gains tax revenue represents a mere 1.1 per cent of the federal government’s overall revenue, yet hurts the economy by discouraging investment and entrepreneurship. As a remedy, Canada could follow the lead of Switzerland, Hong Kong and New Zealand, which impose no capital gains taxes, and as a result, boost impressive savings and investment rates. Hong Kong, for example, has a higher savings rate than most developed countries (including Canada) and has emerged as a major financial centre and location for regional corporate headquarters. Switzerland is also a popular investment destination for global investors and companies. “Capital gains tax revenue comprises a small share of federal tax revenues, so eliminating the tax could liberate locked-in capital and provide a considerable boost to the Canadian economy at a small cost,” said Charles Lammam, book co-editor and Fraser Institute associate director of tax and fiscal policy.

Lower the capital gains tax rate

Finally, to better compete with other countries and make Canada more attractive to investment, Canada could simply lower the capital gains tax rate. “If Canada cuts the capital gains tax rate to be more competitive with other countries, it would draw new investment into the country,” Clemens said. “As Canada transitions from a federal budget deficit to a surplus, it can learn from other jurisdictions and reform capital gains taxes, laying the foundation for long-term economic growth for the benefit of all Canadians,” Lammam said. Jason Clemens, Executive Vice-President, Fraser Institute Charles Lammam, Associate Director of Tax and Fiscal Policy