The Parliamentary Budget Office projects the Liberal government’s capital gains tax increases will increase income tax revenue by $17.4 billion between 2024-25 and 2028-29.
in The report was released Thursday morningBut the PBO estimate was lower than the government’s projected revenue from the tax changes, which was pegged at $19 billion over the same period in the 2024 budget.
The additional tax revenue was announced as a way to fund billions of dollars of new spending in the budget.
The increase in the capital gains “tax rate” that took effect on June 25th raised the tax rate on individuals’ capital gains over $250,000 from one-half to two-thirds.
The change would result in all capital gains earned by corporations and trusts being taxed at a two-thirds rate.
Capital gains from the sale of a principal residence are tax-free.
The PBO used Canada Revenue Agency tax returns to calculate the historical ratio of capital gains to the total tax base of individuals, trusts and private corporations. The PBO combined these ratios with its own internal fiscal projections to come up with updated figures for how much revenue the tax hikes would bring in.
Individuals have options to mitigate the impact: PBO
In its analysis, the PBO said it also took into account the possibility that taxpayers might knee-jerk try to dispose of assets in the 10 weeks between the introduction of amendments in the draft budget and the June 25 deadline.
“It was expected that companies would experience a significant increase in realized capital gains by June 25, as all capital gains will be subject to the higher tax rates from that date onwards,” the PBO wrote.
“In contrast, only the portion of capital gains over $250,000 per year is subject to that higher tax rate, so individuals have more options to mitigate the impact of higher tax rates over the long term.”
Some business groups have expressed concern that the new capital gains tax changes could hurt economic growth, but Small Business Minister Rechy Valdes said most Canadians will not be affected by the changes and that they are intended to create fairness.
From there, the PBO said it revised its forecast downwards, assuming tax revenues in the first 10 weeks would be higher than in subsequent years.
“Capital gains are more volatile than other types of income and are difficult to predict because they are affected by many factors, including market conditions, business cycles and tax changes,” the PBO acknowledged, noting that this volatility could reduce total tax revenues by as much as $15.6 billion after accounting for elasticities.
He also said certain assets, such as real estate, unvested stock options and shares in unlisted companies, cannot be easily converted into cash because of the strict 10-week time limit.
“Based on an analysis of the breakdown of asset types held by taxpayers, we estimate a 15 percent increase for corporations and a 10 percent increase for individuals,” the PBO wrote.
“However, these assumptions contain significant uncertainties due to the lack of a draft bill (it was only introduced on June 10, 2024), the limited time available for taxpayers to plan, and the minority government situation, which creates a degree of uncertainty regarding the adoption of these legislative changes.”
