Better tax treatment of capital gains will improve economy

Article content material

Final week, I appeared as a witness earlier than the Home of Commons Finance Committee concerning the proposed capital gains inclusion rate increase, and it was not shocking to listen to the Liberal and NDP committee members, and their witnesses, go on about how nice the capital beneficial properties inclusion fee proposal is.

Frankly, it’s exhausting to take heed to such nonsense. A few of that nonsense? “Research have concluded {that a} excessive capital beneficial properties inclusion fee — or full taxation — of capital beneficial properties has no influence on a rustic’s financial outcomes.” Yeah, proper. For each such research, I’ll present you three that say in any other case.

Article content material

The most recent research, launched by economist Jack Mintz final week, concludes that the inclusion fee improve will trigger Canada’s capital inventory to fall by $127 billion, employment will decline by 414,000, gross home product (GDP) will fall by virtually $90 billion and actual per-capita GDP will decline by three per cent. Troubling conclusions.

Others go on and on about “tax breaks” or “equity” when it’s apparent they don’t have a fulsome understanding of our nation’s tax system.

However my favorite is “a buck is a buck is a buck.” That line is a summarized phrase from the suggestions of the Royal Commission on Taxation that was convened in 1962 to check the taxation system and make solutions for enchancment.

After 4 full years of research, the fee launched its landmark report in 1966. A lot of its suggestions had been controversial. Some had been finally carried out (with some modifications) and others had been outright rejected.

The advice to maneuver to a household taxation system is an instance of 1 being outright rejected (wrongly, for my part). Very beneficiant employment expense deductions was one other that was rejected (rightly, for my part). The complete taxation of capital beneficial properties advice was modified (rightly, once more).

Article content material

Article content material

In 1966, Canada’s inhabitants and economic system had been a lot smaller than they’re immediately. Our taxation system was in its infancy. Capital beneficial properties weren’t taxable. There was a lot mischief concerned in planning to create capital beneficial properties (which may in any other case be taxable revenue) or in taxpayers taking the place that sure financial wins had been capital beneficial properties.

Accordingly, the fee mentioned the next with respect to capital beneficial properties: “A greenback gained via the sale of a share, bond or piece of actual property bestows precisely the identical financial energy as a greenback gained via employment or working a enterprise. The fairness ideas we maintain dictate that each ought to be taxed in precisely the identical manner. To tax the acquire on the disposal of property extra evenly than other forms of beneficial properties or in no way could be grossly unfair.”

Thus, the well-known “a buck is a buck is a buck” line was born. This short-shrift abstract of a posh subject is one thing I’ve by no means agreed with. I do agree that the results of numerous financial actions, “a buck,” is similar, however the efforts that go into creating that buck are actually not the identical.

Article content material

In 1969, the federal government of the day — gasp … the Liberals  — agreed that capital beneficial properties ought to certainly be taxable, however rejected the fee’s logic as documented in then finance minister Edgar Benson’s well-known Proposals for Tax Reform paper launched that 12 months.

“The federal government rejects the proposition that each improve in financial energy, it doesn’t matter what its supply, ought to be handled the identical for tax functions. This proposition, put ahead forcefully by the Royal Fee on Taxation, has typically been summarized reasonably inelegantly as ‘a buck is a buck is a buck.’ However though the federal government doesn’t settle for this idea in all its splendid simplicity, neither does it imagine that the excellence between a so-called ‘capital acquire’ and an revenue receipt is both nice sufficient or clear sufficient to warrant the super distinction from being fully exempt and being fully taxable.”

I agree that phrase is reasonably inelegant and, once more, too simplistic. It ignores a vital function that different international locations all over the world acknowledge when treating capital beneficial properties preferentially from a tax perspective — danger.

Article content material

“Put me on report as an advocate for a low inclusion fee — like 50 per cent — since that decrease inclusion fee gives incentive and acknowledgement of a key situation that most individuals expertise once they initially make investments capital to generate such beneficial properties. That key differentiator is ‘danger,’” I mentioned in my opening remarks on the current committee assembly.

“It takes guts to purchase land, construct a constructing and lease it out, purchase a farm, begin or purchase a enterprise. Most Canadians usually are not wired to just accept that danger … (however) those that may hold on and make one thing out of their dangerous enterprise normally have spin-off advantages for a lot of Canadians. Canada must encourage the creation of extra entrepreneurs and funding in our nation, and a decrease capital beneficial properties inclusion fee is a type of coverage instruments that has traditionally helped with that.”

Employment danger is just not entrepreneurial or investor danger. It’s fully completely different. For individuals who say it’s, I typically problem them to “put their cash the place their mouth is” and change into an entrepreneur.

By that, I don’t imply your small, one-man-band consulting enterprise. Make investments your life financial savings into an actual enterprise. Get a financial institution mortgage to buy your funding. Sweat a bit about making payroll or the mortgage funds in your constructing. Take some actual enterprise danger. Should you settle for my problem, I’m guessing you’ll quickly cease trumpeting your former rallying cries of “equity” and “a buck is a buck is a buck.”

Article content material

You would possibly then really perceive why it’s essential to have governments that encourage entrepreneurship, with preferential therapy of capital beneficial properties being a type of coverage instruments to offer such encouragement.

Kim Moody, FCPA, FCA, TEP, is the founding father of Moodys Tax/Moodys Non-public Shopper, a former chair of the Canadian Tax Basis, former chair of the Society of Property Practitioners (Canada) and has held many different management positions within the Canadian tax group. He may be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody. 

_____________________________________________________________

Should you like this story, join the FP Investor E-newsletter.

_____________________________________________________________

Bookmark our web site and assist our journalism: Don’t miss the enterprise information it is advisable know — add financialpost.com to your bookmarks and join our newsletters here.

Article content material