Canada will soak the rich with capital gains tax jump to raise billions for housing in market where Gen Z can’t catch a break

Finance Minister Chrystia Freeland said the government will tax Canadian companies on two-thirds of their capital gains, up from half currently. That change will also apply to individual taxpayers when they have gains over C$250,000 ($181,000) in a year, though people will still be able to sell the homes they live in tax-free.

In prepared remarks to lawmakers, Freeland said the job of Canada’s tax system is to combat “structural inequality” and that by increasing the tax rate on investment gains, she was merely “asking those who are benefiting from the winner-takes-all economy to pay a little bit more.”

Prime Minister Justin Trudeau’s administration has been sinking in opinion polls, which show that he’s losing younger voters who are frustrated about the high cost of housing. The benchmark home price in Canada has gone up about 60% since he took office and apartment rents have also surged — forcing the government to roll out programs to try to accelerate building construction and alleviate the cost crunch. 

Overall, Freeland’s new budget shows a government squeezed between those spending demands, higher borrowing costs and its commitment to keep the deficit — expected at C$39.8 billion this fiscal year — under control. Trudeau and Freeland are now turning to the richest Canadians and corporations to help foot the bill.

The capital-gains inclusion rate hasn’t been this high in decades in Canada. The government expects the hike to generate C$6.9 billion in the current fiscal year, partly because some investors and businesses will rush to sell ahead of a June 25 deadline to avoid the higher tax rate.

“It may reduce the incentive for companies to invest,” said Charles St. Arnaud, chief economist at Alberta Central. “While the tax changes are marginal, they have the potential to impact the perception of Canada’s business environment.”

The capital gains tax rules include some exemptions for entrepreneurs, and individual investors may be able to avoid or delay the tax hit if their holdings are in a tax-sheltered account. 

The change implies that a company selling an asset for a C$10 million gain would pay about C$1 million in capital gains tax under the new rate — assuming a corporate tax rate of 15% — which is about C$250,000 more than currently. 

Over a five-year period, the capital-gains change may generate C$19.4 billion in revenues, the government estimates, with about 55% of that coming from corporations.

Still, Freeland defended the decision as reasonable. In some other countries, including many European nations, corporate capital gains are taxed at the same rate as ordinary income, according to PWC. 

“In thinking about raising revenue, we thought very, very carefully about the investment climate,” Freeland said. “That is one of the principal considerations in my mind, one of the main things that the government is focused on and thinking about. I am confident that the measure that we are putting forward today will not have a negative effect on business certainty.”

Higher Growth

Since last November, the government has added more than C$56 billion in program spending over a five-year period, according to the new fiscal estimates. The money is largely aimed at boosting housing supply, defense and artificial intelligence development. Public debt charges are expected to be about C$11 billion higher over the same period.

“I would characterize this budget as a tax-and-spend budget — a level of spending that is incredibly high,” Robert Asselin, senior vice-president of policy at the Business Council of Canada. “I think it sends the wrong signal at the wrong time, at a moment where our economy does need more investments and when we do have a productivity problem.”

Freeland’s budget assumes a soft landing, and the economy is looking much stronger this year than most forecasters had anticipated in late 2023. Nominal gross domestic product growth will rise 3.8% in 2024, from 2.5% previously, according to the latest projections, boosting tax revenue over the long run. 

The finance minister said she’ll keep her promise to contain deficits to around C$40 billion in the current fiscal year and the next. The shortfall would decline to C$31 billion in 2026-27, around 1% of gross domestic product.

Canada’s debt-to-GDP ratio is expected at 42% in fiscal year 2024-25, reaching 39% in 2029, little changed from last fall. Tuesday’s budget doesn’t include a timeline for a return to a balanced budget.

Freeland previously said her fiscal plan wouldn’t add to inflationary pressures — a claim that most economists believe, according to a March survey by Bloomberg. 

“The Bank of Canada will read this as relatively neutral,” St. Arnaud said.

Conservative Leader Pierre Poilievre called it a “wasteful inflationary budget” that his members will vote against. “That is like a pyromaniac spraying gas on the inflationary fire that he lit. It is getting too hot and too expensive for Canadians,” he said. But the budget is almost certain to pass into law with the support of the opposition New Democratic Party, which favors higher corporate taxes. 

Financing Needs

The government’s borrowing plan sees tapping the bond market for C$228 billion in the current fiscal year, up 12%, with C$60 billion each in planned auctions of five-year and 10-year bonds. 

“The yield curve remains deeply inverted and we’ve seen growing investor appetite for long duration,” said Dominique Lapointe, a macroeconomic strategist at Manulife Investment Management. “That supports the government’s decision to continue heavily issuing at the longer end.” Canada’s 10-year bond closed at 3.731% on Tuesday, about 48 basis points lower than its two-year benchmark. 

Trudeau came to power in 2015 promising to run modest deficits to invest in public infrastructure. The shortfalls have continued, and his government racked up Canada’s highest deficit ever during the Covid pandemic.