Announcing the Liberal government’s proposed changes to capital gains taxes last week, Finance Minister Chrystia Freeland repeated a thought experiment she first suggested in her budget speech back in the spring.
The richest Canadians, Freeland said, should ask themselves whether they “want to live in a country where those at the very top live lives of luxury, but must do so in gated communities behind ever higher fences, using private health care and airplanes, because the public sphere is so degraded and the wrath of the vast majority of their less-privileged compatriots burns so hot.”
Days later, after announcing his party’s intention to vote against the changes, Conservative Leader Pierre Poilievre released a 16-minute video on the topic that referenced Adolf Hitler and Joseph Stalin.
It’s not clear what the examples of those two monstrous dictators should tell us about how capital gains should be taxed in Canada — whether, for instance, 50 per cent of capital gains over $250,000 should be taxed at the normal rate of personal income, or whether the “inclusion rate” should be set at 67 per cent instead.
Nor is it obvious that an increase in the inclusion rate is the only thing keeping the country from realizing the plot of a dystopian horror film.
But if the government was looking for a fight, it has one now. And even if the rhetoric has strayed rather far from the substance, there are real stakes to this fight.
To this debate, Poilievre has now added not only odd historical references but also an element of mystery — a promise to pursue some unspecified tax reform if he forms government.
The Liberal argument and the naysayers
The Liberals have leaned heavily on the argument that the proposed changes are about fairness and equality — that it is predominantly the richest Canadians who will be asked to pay more. Freeland has said that in any given year, “only 0.13 per cent of Canadians — with an average annual income of $1.4 million — will pay more on their capital gains.”
Because capital gains typically are not realized every year, Freeland’s preferred figure likely understates how many Canadians eventually will feel some impact. According to one estimate, 4.3 per cent of tax filers will pay more in taxes at some point in their lifetime as a result of the change in how personal capital gains are taxed.
That would still leave the vast majority of Canadians unaffected. But Poilievre’s line of attack has been based in part on merely poking holes in the government’s rhetoric.
Canada’s capital gains tax increase comes into effect on June 25. Andrew Chang breaks down some misleading claims about the changes coming from both sides of the political aisle and explains who is likely to pay the new tax, how much and how often. Does it really just hit the ultra-rich?
Last week, the Conservative leader asked Freeland to somehow put into law a commitment that no one in the bottom 99.87 per cent of income-earners will pay more as a result of the changes. Seizing on Freeland’s own comments, Poilievre challenged the finance minister to promise that not a single welder, plumber, carpenter, electrician or farmer would be affected.
More substantively, the Conservatives have echoed the Canadian Medical Association’s claim that changes to capital gains taxes will make it harder to recruit and retain doctors. But it’s also fair to ask how much of the burden of supporting provincial health care delivery should fall on the federal tax system.
The Grain Growers of Canada has raised concerns about what the changes will mean for the transfer of family farms. According to the group’s calculations, the transfer of an 800-acre farm in Ontario, generating $14.1 million in capital gains, would soon incur taxes of $4.97 million, as opposed to $3.8 million under the lower inclusion rate.
Having set their preferred frame for this debate, the Liberals risk seeing their proposed changes pecked to death by anecdotes that seem to contradict their central argument. And it remains to be seen whether the Liberals are better prepared for this fight than they were for the last one.
Some have warned that raising the inclusion rate on capital gains will act as a drag on the economy. The tech sector was quick to complain that the changes would discourage investment. And the Conservatives have now dusted off the phrase “job-killing” to describe the Liberal proposals.
In an interview with CBC’s Power & Politics host David Cochrane, Prime Minister Justin Trudeau says “extremely wealthy” people affected by the government’s capital gains tax hike are trying to convince others that more people are going to be impacted.
Concerns about the economic impact of setting the inclusion rate at 66 per cent have to contend with the fact that the rate was 75 per cent for all of the 1990s. Did the Canadian economy suffer as a result? Was something demonstrably gained when the rate was reduced to 50 per cent in 2000?
Any economic cost would also have to be balanced against the tax revenue that is gained — an estimated $19.4 billion over the next five years. And the Liberals have been very deliberate and consistent about linking that additional revenue with new spending on housing, pharmacare and dental care.
Poilievre’s promise of tax reform — at a later date
Given his political leanings, it probably shouldn’t be surprising that Poilievre has chosen to oppose the Liberal tax changes. Back in 2004, the Conservative leader seems to have been in favour of eliminating capital gains taxes entirely (the Conservative party platform that year called for a “reduction”).
And by trying to make the debate about plumbers and carpenters, Poilievre presumably is hoping also to undercut any suggestion that his position on capital gains contradicts his claim to be a champion of “common” people and an enemy of the “elites.”
But Poilievre didn’t simply decide to oppose the Liberal proposals. He also promised that, within 60 days of the Conservatives forming government, he would establish a “tax reform task force” composed of “entrepreneurs, inventors, farmers and workers.”
The task force, he said, would be charged with proposing ways to make taxes “lower,” “simpler” and “fairer.” Specifically, the goals would include “lower taxes on work, hiring and making stuff,” “reducing the share of taxes paid by the poor and middle class” and “cutting tax-funded corporate welfare.”
Unless Poilievre imagines that his proposal requires some kind of royal commission, there’s nothing stopping him from establishing such a task force tomorrow. If it worked through the summer and fall, it could have recommendations ready to be included in a Conservative Party platform in time for an election in 2025.
But in that case, the Conservatives would also have to be ready to explain how they would account for any resulting drop in government revenue.
In lieu of such clarity, the tax debate in the next election now threatens to be newly complicated. The Liberals are proposing to fund a series of programs through higher capital gains taxes. The Conservatives are now offering the repeal of that tax increase — perhaps at the expense of programs like dental care or pharmacare — and the contents of a mystery box.