Bad policy on capital gains leads to more distrust, more departures

Article content

There’s no shortage of studies, articles and papers on the deployment of public policy by government and the behavioural impact it has on citizens, so most governments say they are well advised by so-called public-policy experts when introducing new laws.

Notwithstanding such academic studies and experts, let’s apply a little common sense: Governments that introduce new policies that are so obviously bad or flawed can expect significant behaviour changes and/or backlash.

Article content

Article content

That’s what we have had with the proposed capital gains inclusion rate increase, which was introduced as part of the 2024 federal budget. For individuals, the capital gains inclusion rate will increase to two-thirds from its current 50 per cent rate for any annual capital gains realized in excess of $250,000 after June 24, 2024. For corporations and trusts, no such $250,000 threshold will apply.

The government said this would impact only 0.13 per cent of taxpayers, which is both blatantly false and purposely misleading. The simple truth is that these new measures will impact virtually all Canadians in a direct or indirect way. In a world where trust levels in government are already low, such misleading messages cause many to push back and further distrust what is being fed to us by governments.

Notwithstanding that, there will always be a significant part of the population that will lap up government pablum. The government knows this and it counts on it in order to garner support and hope that the number of people who backlash against such false messaging is not too great.

Article content

Article content

Similarly, with the government feeling the heat shortly after the introduction of these proposals, Prime Minister Justin Trudeau took a cheap shot at accountants since they can apparently cut a person’s tax bill in half if you’re able to hire one. This statement is ridiculously false.

The PM also started trumpeting the vacuous speaking point that the capital gains inclusion rate increase was necessary to deal with “inter-generational fairness.” Nope. It sounds good, but in reality, the increase is a simple revenue-generating measure to deal with out-of-control spending and the growing need to pay for it. Such misleading statements again cause able-minded people to lose faith in government.

Another part of the messaging about the capital gains inclusion rate increase was that it is necessary for the so-called “rich” to pay just a little bit more. But they already pay a large and disproportionate amount of Canada’s overall tax revenues and those who yell out, “Tax the rich,” need to appreciate both how much the so-called rich are already paying and what behavioural changes will result from asking them to pay “just a little bit more.”

Article content

One significant consequence of asking the rich to pay just a little bit more is the accelerating number of successful Canadians leaving the country. I am certainly experiencing that in my practice and I’m not alone. As I have mentioned before, those people who say “don’t let the door slam you on the way out” should get up to speed on how devastating it is for all Canadians when a large number of successful people leave. It’s simply not good.

Successful Canadians are continuously facing attacks from increased tax rates and on income splitting with private businesses, as well as threats of a wealth tax and the inevitable other tax increases as a result of out-of-control government spending, so they will do what is necessary to get out of the line of attack and move to more friendly territories.

An unsubstantiated rumour floating around the internet over this past weekend was that the government of Canada is considering making it more difficult and expensive for such successful Canadians to leave the country. Even if such a rumour were true, mark my words: successful Canadians will not be hindered.

Article content

If the analysis by such people is that they need to leave, they will, regardless of any further hindrances the government may introduce to make it more difficult. Frankly, making it more difficult to leave Canada would likely backfire and even accelerate the pace of such departures.

The government needs to drop its poorly thought-out (and so obviously political) capital gains inclusion rate increase. If it does not, a significant consequence will be reduced incentives for entrepreneurs and investors to invest here, resulting in less investment capital coming to or staying in Canada. At a time when the country desperately needs to deal with its domestic productivity emergency, this is the last thing we need.

If the government does not drop this silly proposal, it should at the very least listen to the recommendations made by the Joint Committee on Taxation of the Canadian Bar Association and CPA Canada. Its recommendations — such as quickly releasing the draft legislation and extending the application date from June 25, 2024, to Jan. 1, 2025, to enable affected Canadians better time to plan their affairs — have been carefully thought out by the dedicated and smart committee members (full disclosure, I used to be a co-chair).

Article content

Albert Einstein famously once said: “Whoever is careless with the truth in small matters cannot be trusted with important matters.”

Very true. In Canada’s case, the careless introduction and disingenuous messaging (and subsequent vigorous defence) of the capital gains inclusion rate increase are causing even more Canadians to distrust this government. This has and will continue to accelerate significant behavioural changes by many.

Again, the government needs to drop the capital gains inclusion rate increase.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimmoody.

_____________________________________________________________

If you like this story, sign up for the FP Investor Newsletter.

_____________________________________________________________

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content