Details on capital gains changes finally released, but Canada is still in bad shape

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The Parliamentary Budget Officer released a report last week that estimated the federal government will raise $17.4 billion in extra tax revenues over the next five years as a result of the proposed capital gains inclusion rate increase to two-thirds from 50 per cent. The federal budget, however, estimated the increase would raise $19.3 billion over that time frame. That $1.9-billion difference, or 9.8 per cent, is material.

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The PBO also estimated the federal government would only raise $5 billion in 2024-2025 versus the $6.9-billion estimate in the 2024 federal budget — again a $1.9-billion difference, or 27.5 per cent.

Recall that the increased capital gains inclusion rate was announced on Budget Day, April 16, but the effective date of the increase was arbitrarily chosen to be June 25. The government was shamelessly encouraging Canadians to trigger capital gains on an accelerated basis during this roughly 10-week period to collect extra taxation revenues. The government worked this extra taxation revenue into its 2024/2025 budget to enhance the appearance that it was keeping the deficit within its announced target.

That is a disgusting way to do government budgeting and goes against the basic principle of investing: don’t let the tax tail wag the investment dog. Unfortunately, that is exactly what the government was encouraging Canadians to do.

I’ve criticized the government harshly for this encouragement and predicted the estimated tax revenues of $6.9 billion for 2024/2025 will be significantly less. Why? Well, for similar reasons that the PBO stated in its report. There simply was too little time and uncertainty to adequately plan in advance of the June 25 deadline. The draft legislation providing most of the critical details of the proposal — but not all — was released on June 10, a mere two weeks before implementation of the proposal.

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And the uncertainty continues. The Department of Finance stated when the draft legislation was released that the current package of proposals “will be followed by the release of updated draft legislation this July.” On Monday, the additional draft legislation was released for consultation until Sept. 3, 2024.

Why the delay until mid-August as opposed to the end of July as promised? Obviously, I don’t exactly know. But I do know that the bureaucrats who are in charge of drafting the applicable legislation are working hard to appease their political masters. Does the Department of Finance, specifically the tax legislation division, need more qualified people? Likely. Such people are definitely hard to find. Notwithstanding, the finance department overall had 942 people under its employ as of March 31, 2024. That is an increase of 199 people, or 27 per cent, since 2015. That is material.

To be fair, the tax legislation division is a much smaller subset of the whole, so it’s hard to determine precisely from publicly available data whether there has been a material change since 2015. My guess is that there hasn’t been one. But there likely should be given the huge volume of tax legislation released in the past few years and the critical function this small group of bureaucrats performs.

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Compare that to the staggering 47.6 per cent increase in headcount at the Canada Revenue Agency from 2015, which is not good value for taxpayers’ dollars.

Where does this all leave us? Well, our current federal government has a knack for implementing poor tax policies. Poorly thought-out policies (such as the denial of expenses on short-term rental property owners that operate in a municipality that prohibits such rentals and the “flipping tax”), last-minute policies (like the capital gains inclusion rate increase), outright political attacks on groups that are not part of the current government’s voter base (such as the attack on small businesses in 2017, the recent amendments to the Alternative Minimum Tax and the 2016 increase in personal tax rates on the so-called rich) all leave our country sorely lacking in good taxation policy development and implementation.

As the eminent economist Jack Mintz recently said in this newspaper: “Whoever leads the government after the October 2025 election — which can’t come soon enough — seems likely to inherit a bad economy, big public deficits and a moribund private sector. The last thing we need are more of the wacko policies that got us here. What we do need are ideas that will grow Canada’s economy and wealth so we can enjoy the good life.”

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I would add that we also need a better process for implementing tax policy. Currently, the development and implementation of taxation policies are the sole purview of the Department of Finance. I’m likely dreaming, but I believe a more inclusive and transparent method of developing and implementing taxation policies for the benefit of all Canadians — not just groups that appease the governing party’s voter base — would be ideal. The United Kingdom attempted to implement such basic objectives in the early 2010s, but a lot has changed since then.

Perhaps that objective could be achieved with the development of an independent body comprised of parliamentarians and other independent experts who would work closely with the Department of Finance to ensure policy proposals are sound and the financial estimates supporting such proposals are thoroughly vetted (instead of some of the poor estimates that appear to be done to support the current federal budgets).

There should also be consequences, such as delaying the implementation of any proposals, for not meeting publicly announced deadlines.

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Again, I’m likely dreaming, but Canadians deserve so much more accountability and transparency in the development and implementation of taxation policy. It’s time to change that.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at [email protected] and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.

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