Federal government’s capital gains tax hike is worse than you think

Following the recent plunge in Canadian and U.S. stock markets, many Canadians likely saw a sharp decline in the value of their investments. Yet as Canadians reckon with this sudden change, other factors help reduce the return on their investments—namely, higher capital gains taxes.

When an investor sells a capital asset (i.e. stocks) for a higher price than they originally bought it, they realize a capital gain. Prior to this year, investors would pay tax on 50 per cent of any gain (based on their highest marginal personal income tax rate), but the Trudeau government recently increased that inclusion rate to 66.7 per cent for capital gains above $250,000.

This increase will cause economic damage and increase taxes for many middle-class Canadians—despite being framed by the government as a tax increase on the wealthy. And the effect is even more harmful than it first appears because capital gains taxes don’t adjust for inflation.

Inflation, the general rise in the prices of goods and services in the economy, erodes the purchasing power of money. For example, if a basket of goods costs $100 in Year 1, and annual inflation is 4 per cent, that exact same basket would cost $104 in Year 2. The Bank of Canada maintains a target inflation rate of 2 per cent per year, but in recent years the rate has well-exceeded that target.

From 2021 to 2023, Canada experienced an average annual inflation rate of 4.7 per cent. And though inflation is easing and fell to 2.5 per cent last month, by the end of this year prices are still expected to be 17.5 per cent higher than they were in 2020. For comparison, prices increased 6.7 per cent from 2016 to 2020.

While inflation erodes the purchasing power of one dollar, it also erodes the returns people receive from their investments. If an asset increases in value by 5 per cent over one year, but inflation is 4 per cent, the asset’s real value has increased by just 1 percentage point. In other words, of the total 5 per cent gain, 4 percentage points are the “inflationary” gain while 1 percentage point is the “real” gain.

Which takes us back to the Trudeau government’s tax hike on capital gains. Unlike income thresholds for federal personal income taxes, which are adjusted to account for inflation, capital gains taxes don’t distinguish between “inflationary” and “real” gains. Therefore, even if a realized capital gain is solely inflationary—meaning there’s no increase in real wealth—the federal government will still levy the same amount of tax as it would if there was no inflation at all.

This is what’s happening right now. After years of high inflation, inflationary gains represent a significant share of the capital gains Canadians are currently realizing. For example, from the beginning of 2020 to the end of 2023, the S&P/TSX Composite Index (Canada’s benchmark stock market index) increased 22.6 per cent. However, after adjusting for inflation (a cumulative 14.7 per cent), that 22.6 per cent represents a real gain of less than 8.0 per cent. As such, a large portion of revenue the Trudeau government expects to generate from raising capital gains taxes will originate from inflationary gains rather than actual increases in asset values.

As Canadians struggle with a weak economy, the Trudeau government’s recent capital gains tax hike will only add to the problem. But after years of high inflation, the effect is even worse than you might think.

Authors:

Jake Fuss and Grady Munro

Related Topics:#FraserInstitute #GradyMunro #JakeFuss CanadiansInvestments CapitalGainsTaxInflation

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Worst kept secret—red tape strangling Canada’s economy

Published on February 22, 2025

Todayville

From the Fraser Institute

By Matthew Lau

In the past nine years, business investment in Canada has fallen while increasing more than 30 per cent in the U.S. on a real per-person basis. Workers in Canada now receive barely half as much new capital per worker than in the U.S.

According to a new Statistics Canada report, government regulation has grown over the years and it’s hurting Canada’s economy. The report, which uses a regulatory burden measure devised by KPMG and Transport Canada, shows government regulatory requirements increased 2.1 per cent annually from 2006 to 2021, with the effect of reducing the business sector’s GDP, employment, labour productivity and investment.

Specifically, the growth in regulation over these years cut business-sector investment by an estimated nine per cent and “reduced business start-ups and business dynamism,” cut GDP in the business sector by 1.7 percentage points, cut employment growth by 1.3 percentage points, and labour productivity by 0.4 percentage points.

While the report only covered regulatory growth through 2021, in the past four years an avalanche of new regulations has made the already existing problem of overregulation worse.

The Trudeau government in particular has intensified its regulatory assault on the extraction sector with a greenhouse gas emissions cap, new fuel regulations and new methane emissions regulations. In the last few years, federal diktats and expansions of bureaucratic control have swept the auto industry, child care, supermarkets and many other sectors.

Again, the negative results are evident. Over the past nine years, Canada’s cumulative real growth in per-person GDP (an indicator of incomes and living standards) has been a paltry 1.7 per cent and trending downward, compared to 18.6 per cent and trending upward in the United States. Put differently, if the Canadian economy had tracked with the U.S. economy over the past nine years, average incomes in Canada would be much higher today.

Also in the past nine years, business investment in Canada has fallen while increasing more than 30 per cent in the U.S. on a real per-person basis. Workers in Canada now receive barely half as much new capital per worker than in the U.S., and only about two-thirds as much new capital (on average) as workers in other developed countries.

Consequently, Canada is mired in an economic growth crisis—a fact that even the Trudeau government does not deny. “We have more work to do,” said Anita Anand, then-president of the Treasury Board, last August, “to examine the causes of low productivity levels.” The Statistics Canada report, if nothing else, confirms what economists and the business community already knew—the regulatory burden is much of the problem.

Of course, regulation is not the only factor hurting Canada’s economy. Higher federal carbon taxes, higher payroll taxes and higher top marginal income tax rates are also weakening Canada’s productivity, GDP, business investment and entrepreneurship.

Finally, while the Statistics Canada report shows significant economic costs of regulation, the authors note that their estimate of the effect of regulatory accumulation on GDP is “much smaller” than the effect estimated in an American study published several years ago in the Review of Economic Dynamics. In other words, the negative effects of regulation in Canada may be even higher than StatsCan suggests.

Whether Statistics Canada has underestimated the economic costs of regulation or not, one thing is clear: reducing regulation and reversing the policy course of recent years would help get Canada out of its current economic rut. The country is effectively in a recession even if, as a result of rapid population growth fuelled by record levels of immigration, the GDP statistics do not meet the technical definition of a recession.

With dismal GDP and business investment numbers, a turnaround—both in policy and outcomes—can’t come quickly enough for Canadians.

Matthew Lau

Adjunct Scholar, Fraser Institute

Business

‘Out and out fraud’: DOGE questions $2 billion Biden grant to left-wing ‘green energy’ nonprofit`

Published on February 22, 2025

Todayville

From LifeSiteNews

By Calvin Freiburger

The EPA under the Biden administration awarded $2 billion to a ‘green energy’ group that appears to have been little more than a means to enrich left-wing activists.

The U.S. Environmental Protection Agency (EPA) under the Biden administration awarded $2 billion to a “green energy” nonprofit that appears to have been little more than a means to enrich left-wing activists such as former Democratic candidate Stacey Abrams.

Founded in 2023 as a coalition of nonprofits, corporations, unions, municipalities, and other groups, Power Forward Communities (PFC) bills itself as “the first national program to finance home energy efficiency upgrades at scale, saving Americans thousands of dollars on their utility bills every year.” It says it “will help homeowners, developers, and renters swap outdated, inefficient appliances with more efficient and modernized options, saving money for years ahead and ensuring our kids can grow up with cleaner, pollutant-free air.”

The organization’s website boasts more than 300 member organizations across 46 states but does not detail actual activities. It does have job postings for three open positions and a form for people to sign up for more information.

The Washington Free Beacon reported that the Trump administration’s Department of Government Efficiency (DOGE) project, along with new EPA administrator Lee Zeldin, are raising questions about the $2 billion grant PFC received from the Biden EPA’s National Clean Investment Fund (NCIF), ostensibly for the “affordable decarbonization of homes and apartments throughout the country, with a particular focus on low-income and disadvantaged communities.”

PFC’s announcement of the grant is the organization’s only press release to date and is alarming given that the organization had somehow reported only $100 in revenue at the end of 2023.

“I made a commitment to members of Congress and to the American people to be a good steward of tax dollars and I’ve wasted no time in keeping my word,” Zeldin said. “When we learned about the Biden administration’s scheme to quickly park $20 billion outside the agency, we suspected that some organizations were created out of thin air just to take advantage of this.” Zeldin previously announced the Biden EPA had deposited the $20 billion in a Citibank account, apparently to make it harder for the next administration to retrieve and review it.

“As we continue to learn more about where some of this money went, it is even more apparent how far-reaching and widely accepted this waste and abuse has been,” he added. “It’s extremely concerning that an organization that reported just $100 in revenue in 2023 was chosen to receive $2 billion. That’s 20 million times the organization’s reported revenue.”

Daniel Turner, executive director of energy advocacy group Power the Future, told the Beacon that in his opinion “for an organization that has no experience in this, that was literally just established, and had $100 in the bank to receive a $2 billion grant — it doesn’t just fly in the face of common sense, it’s out and out fraud.”

Prominent among PFC’s insiders is Abrams, the former Georgia House minority leader best known for persistent false claims about having the state’s gubernatorial election stolen from her in 2018. Abrams founded two of PFC’s partner organizations (Southern Economic Advancement Project and Fair Count) and serves as lead counsel for a third group (Rewiring America) in the coalition. A longtime advocate of left-wing environmental policies, Abrams is also a member of the national advisory board for advocacy group Climate Power.