Think-tank report calls on Ottawa to scrap capital gains tax

VANCOUVER—A new Fraser Institute report is calling on the federal government to lower or eliminate the capital gains tax as a way to encourage investment and boost Canada’s economy.

Canada is currently home to the 14th highest capital gains tax among the 34-member Organisation of Economic Cooperation and Development (OECD), according to the think-tank, and with the feds staring down the barrel of an impending budget surplus now is the time to change the rate for the first time in nearly 15 years.

“Capital gain taxes carry considerable economic costs and produce relatively little revenue,” Fraser Institute senior fellow Herbert Grubel said in the report’s foreword.

The Fraser Institute estimates revenues from capital gains taxes, imposed on gains from the sale of assets, was only $2.8 billion in 2011.

Combined top rate federal-provincial capital gains tax across Canada averages out at around 23 per cent, with Nova Scotia home to the highest rate—25 per cent—and Alberta the lowest at 19.5 per cent.

The United States has a capital gains tax rate of 27.9 per cent, making it the eight highest out of all OECD nations.

According to the Fraser Institute, 11 OECD countries currently impose no capital gains taxes.

The report said capital gains tax reform in Canada can have a positive effect on investment decisions because of what economists call the “lock-in effect.”

“Because capital gains are only taxed upon realization, high tax rates on capital gains can create an incentive for investors and asset holders to retain their current investments even if more profitable and productive opportunities are available,” the report reads.

“The magnitude of the lock-in effect depends on a number of factors, but a series of empirical studies has found a negative relationship between capital gains tax rates, asset sales, share prices and other proxies for investor activity.

“This leads to inefficient capital allocation, delays in investor redeployment of capital, and distortions in the capital markets, all of which hinder economic growth by limiting the capital that businesses can access. The economic case for capital gains tax reform, then, is rooted in large part in the relationship between taxation and capital supply for new and expanding businesses.”

Eliminating the capital gains tax “could provide a considerable boost to the Canadian economy at a small fiscal cost,” the report continues, unlocking capital for new and existing firms looking to expand while bolstering entrepreneurship, and supporting investment and job creation.

“This would be a productive use of future budgetary surpluses that would help to improve Canada’s economic competitiveness at a time when moderate economic growth is expected for the foreseeable future,” the report reads.

Instead of eliminating the capital gains tax altogether, the Fraser Institute report suggests the inclusion rate could be cut in half, from 50 per cent to 25 per cent, or a rollover mechanism could be introduced for capital gains investment.

“This would effectively keep the basic parameters of the capital gains tax regime in place but allow for a deferral of capital gains taxes for individuals on the sale of assets when the proceeds are reinvested within a certain time frame, perhaps six months,” the report continues about the potential rollover.

“The federal government’s transition from a budgetary deficit to projected fiscal surpluses represents an opportunity to lay the foundation for long-term economic growth, particularly at a time of sluggish economic growth and ongoing concerns about a perceived lack of capital financing for new and expanding firms.”