January , 2025 – One of the most consequential policy changes in this year’s federal budget – an increase in the capital gains inclusion rate – would have far-reaching consequences for Canadians, many of which are underestimated by the government, according to a new study from the C.D. Howe Institute. Leading economist and former President and CEO of the C.D. Howe Institute, Jack Mintz, examines the extensive economic repercussions of this proposed change in his latest report available in full at the end of this article.

Fiscal and Tax Policy

With Parliament prorogued on January 6, the future of the proposed capital gains tax increase remains uncertain. Canadians face the possibility of the measure being passed, amended, or withdrawn entirely under a new government.

Meanwhile, tax planners and the affected individuals and corporations must await the outcome, even though the Canada Revenue Agency began administering the tax on June 25, 2024, after it was announced in the spring budget. At this time, taxpayers could be assessed interest and penalties if they do not comply with the proposed law. If the law is never passed, taxpayers will have to claim refunds. The provincial budgets reliant on the new revenues will be affected if the planned measure is ultimately withdrawn, adding to the confusion and disruption.

“The planned measure to increase the capital gains inclusion rate should never see the light of day when Parliament resumes after March 24, nor be revived thereafter by a new government,” says Mintz. “The hike would create a triple threat: harming Canadian businesses, discouraging investment, and penalizing middle-income Canadians.”

While the government estimated this change would only impact 40,000 individual tax filers and 307,000 corporations, Mintz’s analysis, using longitudinal data, reveals the true impact would be significantly broader. Over 1.26 million Canadians would be affected over their lifetimes – representing 4.3 percent of taxpayers or some 22,000 Canadians per year – with many middle-income earners among those hardest hit.

The report projects significant economic harm caused by the proposed increase – Canada’s capital stock would decline by $127 billion, GDP would fall by nearly $90 billion, and real per-capita GDP would drop by 3 percent. Further, employment would decline by 414,000 jobs, which would raise unemployment from 1.5 million to 1.9 million workers. Importantly, half of the affected individuals would be earning otherwise less than $117,000 annually, with 10 percent earning as little as $18,000, excluding capital gains income.

“This would not just be a tax on the wealthy,” says Mintz. “Many middle-income Canadians would bear the brunt of this increase, and the economic costs would ripple across the entire economy.”

Mintz also highlights the broader implications for Canadian businesses. The planned measure would likely deter equity financing, discourage investment, and exacerbate inefficiencies in financial and corporate structures. Contrary to government claims of “neutrality,” he argues the tax would disproportionately harm domestic companies. These companies will pay corporate capital gains taxes that will increase investment costs. Moreover, they are dependent on Canadian investors due to “home bias” in equity markets. The changes would risk weakening Canada’s productivity and competitiveness at a critical time.

The report further critiques the lack of mechanisms to mitigate the effects of “lumpy” capital gains. Significant asset disposals, such as selling real estate, farmland, business assets, secondary homes or during events like death or emigration, may occur only once or twice in a person’s lifetime. Without provisions to average or defer taxes, individuals would face disproportionately higher burdens. Additionally, the planned tax hike would exacerbate the “lock-in effect,” which discourages the efficient reallocation of capital.

“If the proposed law does not proceed, it would be worthwhile for a government to review capital gains taxation as part of a general tax review that would improve opportunities for economic growth rather than hurt it,” says Mintz.

Read the full report here.