Capital Gains Tax Preferences Benefit Speculative Corporations and Very-High Income Individuals

Capital gains income is starkly concentrated among the richest 1.5% of Canadians, and corporate sectors with non-existent job-creation. They are the main beneficiaries of special loopholes which reduce taxes on capital gains.

That’s the conclusion of a new report, Fact and Fiction on Capital Gains Taxation, co-published by the Centre for Future Work and l’Institut de recherche et d’informations socioéconomiques (IRIS, a Québec-based think tank). 

The vast majority of capital gains are received by the highest-income 1.5% of Canadian households, and by corporations in sectors (like financial intermediation and real estate) that focus on buying and re-selling assets – not on production, innovation, or job-creation.

Key findings of the report include:

• • The highest-income 1.5% of tax-filers (those with total income over $250,000) receive 61% of individual capital gains, and 67% of tax savings from partial inclusion of capital gains.
  • Capital gains are more concentrated among very high-income tax-filers than any other kind of income – even more than other forms of investment income (like dividends or interest).
  • Most very high-income tax-filers (over $250,000) report capital gains, and the average those with capital gains report is over $180,000 per year (not counting the capital gains those tax-filers are allowed to exclude). Average tax savings for those claimants (under the previous 50% inclusion rate) is estimated at $95,000 per year.
  • For very high-income tax-filers, capital gains make up 18% of their total incomes. For those with less than $100,000 income, capital gains make up less than 1% of their (much smaller) total incomes.
  • Capital gains increase the ratio of inequality between top and average incomes by 16%.
  • Capital gains have grown seven times faster than overall personal income, and have tripled as a share of total assessed income (per tax-filer).
  • Federal revenues were reduced by $38 billion in 2021 due to the partial inclusion of capital gains for individuals, trusts, and corporations. Provincial governments lost many billions more.
  • There’s no historic correlation between capital gains taxes and business investment in machinery, equipment, or research. Canada’s strongest sustained technology investment performance was in the 1980s and 1990s, when capital gains inclusion was 66.7% or 75%.
  • Capital gains reported by Canadian corporations have doubled since the COVID pandemic, and risen 11-fold since 2002. Corporate capital gains set a new record in 2022 of $87 billion.
  • Most corporate capital gains are captured by industries that buy and sell assets, rather than engaging in direct production. A growing share (over one-third) is captured by financial firms.
  • The biggest recipients of corporate capital gains, in general, have very poor job-creation records. In the last five years, the two biggest recipients (Miscellaneous Intermediation and Real Estate) received over half of all corporate capital gains, but between them created no net new jobs.

Preferential tax treatment of capital gains has no predictable impact on real investment or job-creation. Treating capital gains more equally with other types of income is not just fair, it will also reduce economic distortions that are undermining real investment and job-creation. Capital gains tax loopholes do not help the middle class – they overwhelmingly aid the rich.

The federal government is moderating the size of these tax loopholes, by increasing the inclusion rate (the share of capital gains which recipients have to declare on their tax returns) from 50% to 67%. This will still leave capital gains facing much lower tax rates than other forms of income (like wages and salaries, which have a 100% inclusion rate), and will only slightly reduce the loss of government revenue from the loophole. 

Please read the full report, Fact and Fiction on Capital Gains Taxation, by Jim Stanford. 

The report is also available in French.