Why a capital gains tax on the rich makes sense

Ever since we’ve been publishing an annual report on CEO pay in Canada, I’ve had a bone to pick: CEOs and the rich generally get a special tax rebate when they sell assets like real estate or stocks at a profit.

That profit is called a capital gain, and if you declare more than $250,000 in a year, your tax break will be smaller due to the government’s surprise change in this year’s budget.

As of June 25, 2024, well-off Canadians declaring over $250,000 a year in capital gains will now have to declare 66.6 per cent of that gain as income instead of only half. This will also apply to corporations.

Put another way, the rich will still get a discount on their taxes for capital gains, but instead of the discount being 50 per cent, it will only be a third. No doubt plenty of crocodile tears will still be shed over this reduction in their incredible deal.

The Canadian Centre for Policy Alternatives has been calling for this ever since we started publishing our annual CEO pay report in January 2007. We’ve been relentless in counting all capital gains income as taxable income. For good reason.

In 2021, CEO pay reached an all-time high in Canada. The 100 best-paid CEOs in Canada pocketed an average of $14.3 million in 2021.

The richest CEOs in Canada now make 243 times more than the average worker – that’s an all-time high. The previous high was 227 times more in 2018.

The new initiative to increase the capital gains inclusion rate will raise an estimated $7 billion in the first year and $20 billion over the next five. Roughly half will be paid by rich individuals and half by corporations.

That isn’t exactly chump change – especially since that will only be paid by the top 0.13 percent of Canadian income earners. We’re talking about only 40,000 well-off people making, on average, $1.4 million a year.

It’s worth reflecting on the incredible wealth in this country – we can generate $7 billion in a single year by narrowing, but not even closing, a single loophole for the rich and corporations.

The elite few whose capital gains are over $250,000 per year can afford to contribute more to public services – it’s a question of fairness. In a delicious turn of events, capital gains are the gains one makes as real estate prices rise. So it’s investors benefiting from massive gains in real estate who will now pay part of it back to fund the massive rental housing build program expanded in this year’s federal budget.

In fact, Canadians used to expect more of the rich. Between 1988 and 2000, the capital gains inclusion rate was at – or above – the proposed 66.6 per cent rate, and it was based on all gains, not just those over $250,000.

In response to this change, the rich will undoubtedly claim they will refuse to invest anymore because their tax rebate isn’t quite as big. The trouble is that even after this tax change, Canada has the lowest marginal effective tax rate on capital gains of any G7 country. Want to get your capital gains in the U.S. or Germany? Their tax rate is 50 per cent higher.

As housing affordability crushes regular Canadians, investors making money on buying and selling real estate and shares should see sweetheart tax breaks narrowed. A fraction of their profits will now be put to the greater good: into a critical affordable rental housing build program, along with pharmacare, support for those with disabilities and better support for students.

David Macdonald is a senior economist with the Canadian Centre for Policy Alternatives.

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