(Bloomberg) — Canada will raise capital gains taxes on businesses and the wealthy to support tens of billions of dollars in new spending aimed at making housing more affordable and improving the lives of young people.
Most Read Articles on Bloomberg
Finance Minister Chrystia Freeland said the government would tax Canadian companies on two-thirds of their capital gains, up from the current half. The changes also apply to individual taxpayers who earn more than C$250,000 (about $181,000) a year, although they can still sell their home tax-free.
In prepared remarks to MPs, Freeland said the role of Canada's tax system is to combat “structural inequalities” and that raising taxes on investment profits would “capture the benefits of a winner-take-all economy.” “We're just asking the people who are receiving it to:” Please pay a little more. ”
Prime Minister Justin Trudeau's government is lagging in opinion polls, which show it is losing young voters unhappy with high housing prices. Canada's benchmark housing prices have risen about 60 per cent since he took office, and apartment rents have soared, forcing the government to roll out programs to speed up building construction and ease cost pressures.
Overall, Freeland's new budget shows the government struggling between spending demands, rising borrowing costs, and a pledge to rein in this fiscal year's budget deficit, which is expected to be C$39.8 billion this fiscal year. It shows that there is. Prime Minister Trudeau and Prime Minister Freeland are now asking the wealthiest Canadians and businesses to help defray the cost.
Read more: Housing-stressed young Canadians turn against Trudeau
Canada's capital gains tax deduction rate has never been this high in decades. The government expects the hike will bring in C$6.9 billion in revenue this fiscal year, as some investors and companies rush to sell ahead of a June 25 deadline to avoid the tax hike. are doing.
“It could reduce the appetite of businesses to invest,” said Charles St. Arnaud, chief economist at Alberta Central. “While the tax changes are small, they can impact perceptions of Canada’s business environment.”
Capital gains tax rules include several exemptions for entrepreneurs, and individual investors may be able to avoid or delay tax liability if their holdings are in a tax-sheltered account.
This change means that a company that sells an asset and makes a gain of C$10 million will pay approximately C$1 million in capital gains tax under the new tax rate (assuming a corporate tax rate of 15%). , which means it will be about CAD 250,000 more expensive than it is now.
The government estimates that over five years, changes in capital gains will generate C$19.4 billion in revenue, about 55% of which will come from businesses.
Still, Freeland defended the decision as reasonable. In some other countries, including many European countries, corporate capital gains are taxed at the same rate as ordinary income, according to PWC.
“We thought very carefully about the investment environment as we looked at generating revenue,” Freeland said. “That is one of the main considerations that is in my mind and one of the main things that the Government is focusing on. I am confident that it will not affect you.”
further growth
The government has added more than C$56 billion in program spending over five years since last November, according to new fiscal estimates. The funds are primarily aimed at promoting housing, defense and artificial intelligence development. The public debt burden is expected to increase by approximately C$11 billion over the same period.
“I would characterize this budget as a tax-and-spend budget, an incredibly high level of spending,” said Robert Asselin, senior vice president for policy at the Business Council of Canada. “I think it's sending the wrong signal at the wrong time, at a time when our economy needs more investment and has real productivity problems.”
Freeland's budget assumes a soft landing, with the economy looking much stronger this year than most forecasters expected in late 2023. According to the latest forecasts, nominal gross domestic product (GDP) growth is expected to increase by 3.8% in 2024, up from 2.5% previously, which would support tax increases. Profit in the long run.
The finance minister said he would keep his promise to limit the deficit to about C$40 billion this fiscal year and next. The shortfall will fall to C$31 billion in 2026-27, equivalent to about 1% of gross domestic product.
Canada's debt-to-GDP ratio is expected to reach 42% in 2024-25 and 39% in 2029, little changed from last fall. Tuesday's budget proposal does not include a timeline for returning to a balanced budget.
Freeland has previously said his fiscal plan would not increase inflationary pressures, a claim most economists believe, according to a March Bloomberg survey.
“The Bank of Canada would view this as relatively neutral,” St. Arnaud said.
Read more: One million simulations, one verdict for the US – debt looms in peril
Conservative leader Pierre Poièvre called it a “wasteful inflationary budget” and his party members are likely to vote against it. “It's like an arsonist spraying gas on the inflation fire he's lit. It's too hot and too expensive for Canadians,” he said. However, with the support of the opposition New Democratic Party, which supports corporate tax increases, it is almost certain that this budget bill will be passed.
financing needs
The government's borrowing plan calls for a 12% increase in C$228 billion to the bond market this fiscal year, with C$60 billion each in five-year and 10-year bond auctions.
“The yield curve remains deeply inverted and we are seeing increased investor appetite for the long term,” said Dominique Lapointe, macroeconomic strategist at Manulife Investment Management. “This confirms the government's decision to continue issuing large amounts over the long term.'' Canada's 10-year bond closed Tuesday at 3.731%, about 48 basis points below the two-year benchmark. .
Prime Minister Trudeau took power in 2015, pledging to run some deficits on public infrastructure investments. Shortages continue, with the government racking up the highest budget deficit in Canadian history during the coronavirus pandemic.
–With assistance from Randy Thanthong-Knight, Brian Platt, and Jay Zhao-Murray.
(Updated bond yield in penultimate paragraph. A previous version of this article corrected additional tax calculation in paragraph 9.)
Most Read Articles on Bloomberg Businessweek
©2024 Bloomberg LP
