The majority of capital gains tax in Canada is paid by households earning less than $150,000 a year, according to a report released Tuesday by the Fraser Institute, a policy think tank in Vancouver.
“Not only do higher capital gains taxes cause economic harm, but they are not paid exclusively — or even mostly — by society’s higher-income members,” wrote Alex Whalen, policy analyst, and Jason Clemens, executive vice-president with the Fraser Institute, in the report.
According to the report, the common “misperception” that capital gains tax is paid mostly by the wealthy arises when you include capital gains in the measurement of a person’s income. When calculated in this manner, the share of capital gains taxes paid by households that earned more than $150,000 in 2020 was 77.4%.
However, when capital gains are not included in income, the share of capital gains taxes paid by households earning more than $150,000 per year falls to 48.0%, with the remaining 52% being paid by households earning less than $150,000 a year.
Excluding capital gains from income gives “a truer picture” of who pays capital gains because it eliminates the distortion that the capital gain itself causes in the calculation, the report argued.
Capital gains are often incurred irregularly, and sometimes years after an asset is acquired. The realization of a large capital gain, perhaps from the sale of a small business, can cause income to spike dramatically in a given year.
“Research claiming that capital gain taxes are paid only by high-income earners tends to count these individuals among the ‘high earners,’” the report argued. “In reality, they often have modest incomes in the years leading up to the capital gain and in years thereafter. However, in the data, they show up as a high earner.”
When capital gains are excluded from income, the estimated share of capital gains taxes paid by households earning less than $100,000 a year was 38.4% in 2020, compared to 12.8% when capital gains were included in income, the report found.
The report argued against raising the capital gains inclusion rate from the current 50% level to 75%, a policy proposed by some politicians in recent years as a way of addressing income inequality. Instead, “capital gains taxes should be reduced or even eliminated,” as capital gains taxation raises the cost of capital, reduces entrepreneurship and hurts the economy, the report suggested.