Capital Gains Tax Hike Would Significantly Impact Canada’s Economic Competitiveness

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Why increasing capital gains taxes could harm Canada’s investment climate and overall economic growth


In the spring of last year, the Canadian government, led by Prime Minister Justin Trudeau, proposed an increase to the capital gains tax, but the proposal was not approved before the government's decision to prorogue Parliament. This move was followed by some uncertainty, as the delay in passing the tax hike prompted questions about whether the new government would cancel the planned increase altogether.

To resolve this ambiguity, Finance Minister Dominic LeBlanc confirmed that the capital gains tax hike would be postponed until January 1, 2026, well beyond the next federal election. This extension offers clarity for now, but rather than delaying the tax increase, the Canadian government should reconsider the proposed hike entirely. Not only would this tax increase take more money from Canadians, but it would also weaken Canada’s competitiveness on the global stage.

Understanding Capital Gains Taxation in Canada

Capital gains refer to the profit made when an individual or corporation sells an asset, such as real estate or stocks, for more than its original purchase price. Historically, the Canadian federal government taxed only 50% of that gain, meaning half of the capital gain was included in taxable income. The Trudeau government’s proposal, however, would raise this inclusion rate to 66.7% for individuals earning over $250,000 annually, as well as for all corporate capital gains.

Although the government argued that this change would primarily impact the wealthiest Canadians, the reality is that middle-class Canadians would also face higher taxes due to this increase. Furthermore, higher capital gains taxes would make investing in Canadian businesses more expensive, resulting in reduced business investment, slower wage growth, and less overall economic expansion. When businesses face higher taxes on capital gains, their ability to invest and grow is directly affected, which in turn impacts Canada’s economic performance.

Impact of the Capital Gains Tax Increase on Canada’s Global Competitiveness

The capital gains tax proposal would place Canada at a significant disadvantage compared to other countries, particularly in terms of attracting business investment. A recent study by the Fraser Institute illustrated that with the current inclusion rate of 50%, Canada’s capital gains tax rate is ranked in the middle of the pack among 37 advanced countries. The ranking falls between 17th and 23rd, depending on the province, which means Canada is not among the highest taxed nations when it comes to capital gains.

However, raising the inclusion rate to 66.7% would push Canada’s capital gains tax rate into the top 8 to 13 highest worldwide, depending on the province. This means that over three-quarters of OECD countries would have a lower tax rate on capital gains than Canada, further hindering the nation’s ability to compete in a globalized economy.

If the capital gains tax hike is implemented, it would become increasingly difficult for Canada to retain and attract business investment. In a competitive global market, companies are more likely to invest in countries with more favorable tax policies, where they can achieve better returns. A higher capital gains tax rate would diminish Canada’s ability to draw in the foreign direct investment (FDI) required to maintain and grow its economy, potentially resulting in stagnation and lost economic opportunities.

A More Competitive Solution: Lowering Capital Gains Taxes

Instead of raising the capital gains tax rate, Canada should consider reducing it in order to improve the country's investment climate and economic competitiveness. For example, if the government reduced the inclusion rate to 33.3%, Canada's capital gains tax rate would rank between 30th and 31st out of 37 OECD countries, making it more attractive for businesses to invest in Canada.

By lowering the tax rate, Canada could position itself as a more competitive destination for investment, attracting business activities that would fuel economic growth, job creation, and rising wages. Countries like the United States, the United Kingdom, and Germany all maintain lower capital gains tax rates than Canada would if the proposed increase goes forward. This global tax environment makes it clear that Canada risks falling behind other developed nations in terms of tax competitiveness, which could negatively impact its long-term economic prosperity.

Conclusion: A Path to Stronger Economic Growth

While the current government may continue to push for higher taxes, the next federal administration should focus on making Canada’s tax system more competitive. Lowering capital gains taxes, rather than increasing them, would improve Canada’s investment appeal, foster economic growth, and ultimately lead to higher wages for Canadians. The government should prioritize policies that attract investment, promote business growth, and ensure Canada remains competitive in the global market.

In conclusion, the proposed capital gains tax hike is not just a financial burden on Canadians—it is an economic disadvantage that risks weakening Canada's position in the global economy. By considering a reduction in the capital gains tax, the Canadian government could pave the way for a stronger, more competitive economic future.

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