How Pressing is it to Revisit the Treatment of Capital Gains?

Abstract

Lowering or eliminating the tax on capital gains may be a tempting undertaking for Canada's federal government facing electorate pressure. It may also be a tempting course of action for interest groups and public policy stakeholders. To analyse the merits of such a policy measure, this paper explores two queries. Fist, how the previous changes in capital gains taxation affected the level of realization of capital gains? And, second, do provincial differences in tax rates transpire into differences in the intensity of realizing capital gains? The analysis shows that only a relatively small number of Canadians report capital gains and a smaller proportion of them effectively pay taxes on capital gains. The changes in capital gains tax rate introduced in 2000 lead to only a temporary increase in intensity and volume of realized capital gains. Similarly, no significant increase in holdings of capital assets by households was observed. The analysis of provincial differences in tax rates levied on capital gains also does not conclusively show that lower tax rates lead to a higher turnover of investments.capital gains, taxation of capital gains