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The Trudeau government's decision to increase capital gains taxes, as outlined in the 2024 federal budget, has drawn significant criticism and concern over its potential negative impact on Canada's economic growth and investment climate. The move entails raising the inclusion rate for capital gains from 50% to 66.6% for businesses, trusts, and individuals with capital gains exceeding $250,000. One major issue highlighted is the "lock-in" effect caused by taxing gains only upon asset sale. This means investors delay selling assets, anticipating a reversal of tax policies under future governments. Consequently, the Trudeau government's revenue projections from the tax hike might be overly optimistic.
Moreover, higher capital gains taxes discourage investment and innovation, impacting economic growth negatively. Canada's GDP per person growth is among the lowest in the OECD, and business investment has declined significantly. Critics argue that raising capital taxes exacerbates these challenges. Despite the government's focus on taxing the wealthy, the broader impacts on economic growth affect all Canadians, lowering incomes and living standards. Previous governments recognized the negative impact of capital gains taxes and took steps to reduce them, understanding the importance of fostering a robust investment climate. In summary, the increased capital gains tax is seen as counterproductive to Canada's economic recovery and growth. Critics argue that it discourages investment, innovation, and economic competitiveness while contributing to a deteriorating fiscal outlook.
David Rosenberg, Founder of Rosenberg Research & author of the daily economic report sharply criticizes Canada's 2024 budget for its excessive spending, projecting a $53 billion increase over five years compared to the Fall Economic Statement 6 months prior. He highlights concerns about persistent fiscal slippage under Prime Minister Justin Trudeau's leadership, compounded by tax hikes that hinder business competitiveness. Rosenberg warns that the budget's structural deficits will lead to escalating public debt charges, exceeding $57 billion by 2026. The budget's expansion of program spending to 16% of GDP and lack of fiscal restraint raise further alarms. He argues against increased capital gains taxes, which he believes will discourage investment. Overall, Rosenberg predicts negative economic impacts and deems the budget a failure.
Former Liberal finance minister Bill Morneau expressed significant concern over the proposed increase in the inclusion rate on capital gains exceeding $250,000 in Finance Minister Chrystia Freeland's recent budget. Morneau, speaking at a webcast hosted by KPMG to react to the budget, described the move as "very troubling for many investors." He emphasized that during his tenure as finance minister, any notion of heightening capital gains taxes was staunchly opposed due to its potential negative impact on economic growth and investment.
Morneau stressed that the resistance against such tax increases was driven by a clear understanding of their chilling effect on economic expansion. He firmly believes that the proposed changes will hinder Canada's long-term goal of achieving robust economic growth through productive investment. This criticism from Morneau, a former member of the Liberal government, underscores the concerns within the business community regarding the budget's approach to capital gains taxation.
Over the last couple of days we've received many calls from concerned investors regarding realization of capital gains on inherited properties and estate sales. This new tax policy has created additional stress to investors and begs the question what happens next?
We are currently working with our clients to help them navigate through this new tax policy and plan for the future ahead.
If you have questions or concerns about your particular situation, please reach out to the team.
To read more about the 2024 Federal Budget, we recommend the iA Private Wealth Research Insight:
Sources:
Opinion: Higher capital gains taxes won’t work as claimed, but will harm the economy - The Globe and Mail
(April 16, 2024) - The Globe and Mail
David Rosenberg: The budget deserves a failing grade and will make the fight against inflation even harder - The Globe and Mail
April 18, 2024 - The Globe and Mail
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Investors are having a hard time adjusting to central bank tightening, trade war rhetoric, and a global growth slowdown. This has led to sharp valuation compression. Almost 90% of all global asset classes have generated negative returns, the highest proportion recorded in over a century. Meanwhile, cash is outperforming global equities and bonds for the first time since 1994. So, it seems fair to say that 2018 has been a tough year.
If excessive monetary tightening, escalating trade wars and a growth slump form the basis for worry, then the investment outlook for 2019 is beginning to brighten:
§ U.S. monetary authorities have signaled that they will slow their pace of tightening, while other major central banks push out the date for when they might start their respective tightening cycles;
§ The Sino-U.S. trade war appears to be de-escalating, the USMCA has been signed and the largest bilateral trade deal in history, between the EU and Japan, goes into effect March 2019;
§ A global recession seems unlikely over the next year. Ongoing growth will be aided, in large part, by the world’s two largest economies - U.S. and China.
Clement Gignac, Senior VP, Chief Economist
iA Financial Group
According to Deutsche Bank, close to 90% of combined bonds, equities and commodities indices are posting a negative YTD return. A first since 1901...
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