An increase in capital gains tax would harm investment, according to the MEI

Chrystia Freeland assured that the increase in the tax rate will not affect the investment climate. (Photo: The Canadian Press)

Increasing the capital gains inclusion rate will hurt Canada’s economy by discouraging investment, in addition to irritating doctors who might be tempted to see if the grass is greener elsewhere, according to the Montreal Institute of Economics (IEDM).

“We are raising taxes on investments and business,” complains economist Emmanuelle Faubert in an interview. So, logically, it negatively affects the business.”

The federal budget proposes to increase the capital gains inclusion rate from 50% to 66% of the $250,000 threshold for individuals, effective June 25. The increase will affect all profits of corporations and trusts. Quebec will also follow suit at the federal level.

The Quebec investor will thus see an increase in the tax rate from 26.65% to 35.54% on profits above $250,000, the think tank linked to the economic right points out in a note published on Thursday.

An increase in the tax burden of this magnitude will have the effect of discouraging investment at a time when the Canadian economy is facing structural problems. “We must not forget that in the context of Canadian productivity, we are quite behind the United States,” points out Emmanuelle Faubert.

Another consequence is that entrepreneurs and venture capitalists could hold their shares longer to defer the tax, reducing the capital available for new projects, adds Emmanuelle Faubert. “Ultimately, there’s less liquidity in the market, less corporate funding, which means there’s less economic growth.”

The change is causing discontent among registered doctors, who are seeing an increase in their tax rate. The Canadian Medical Association has also asked the federal government to review its decision.

“One of the risks is that in a situation where we have a shortage of doctors, there is a risk that they will run away even more,” fears the IEDM economist. Maybe they’ll decide to go somewhere else where they can earn better.”

Ottawa defends its measures

Finance Minister Chrystia Freeland assured that the increase in the tax rate will not affect the investment climate in Canada.

The budget also provides relief to replacement entrepreneurs when they sell part or all of their business.

The lifetime capital gains exemption for the sale of a small business or agricultural and fishing property will increase from $1 million to $1.25 million from June 25.

Further tax cuts will take effect gradually starting in 2025. In 2034, an entrepreneur who sells his business would pay no tax on the first $1.25 million in capital gains. For another $2 million, he would pay tax on only a third of his profit.

Opinions on the impact of the increase in capital gains tax vary. Prominent voices from the business world and economists condemned the measure, saying it would have an adverse impact on investment.

Other economists, on the other hand, believe that the measure would make it possible to reduce social inequalities and finance public spending.

Professor Jonathan Rhys Kesselman of Simon Fraser University said in the study that the effect of the increase in the capital gains tax rate on the economy was “mixed and difficult to quantify”. “For about a decade in the 1990s, the inclusion rate was 75% with no adverse effect on economic performance.”

Before the budget was released, tax researcher Luc Godbout of the Research Chair in Taxation and Public Finance (CFFP) at the University of Sherbrooke advised taxing three-quarters (75%) of capital gains, which is even higher than the change proposed by the federal government.

“The reduction of the capital gains benefit could be implemented in the short term and in a relatively simple way, thereby freeing up significant sums,” Luc Godbout wrote in a memorandum submitted as part of the pre-budget consultation.

Emmanuelle Faubert argues that economic theory supports the MEI argument. It emphasizes that costs influence behavior. Higher investment taxation would thus have an impact on the decision-making of entrepreneurs and investors.

He cites a study by two UK economics professors showing that US states that raised capital gains tax rates saw a decline in venture capital investment as well as the number and “quality” of patents between 1987 and 2014. .

The tax change would affect a limited number of taxpayers. Only 40,000 Canadians declared capital gains of more than $250,000 per year. That would represent 0.13% of taxpayers, or 13% of the famous 1%.

However, the taxation of this minority should be everyone’s business, claims Emmanuelle Faubert. “It affects everyone. Investments are a tool that allows us to improve the quality of our lives. If it weren’t for that, there wouldn’t be all the improvements in our quality of life.”

Author: Stéphane Rolland

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