Market News

By Mathieu Dion and Melissa Shin

A tax increase that’s unlikely to ever become law has nonetheless earned the Canadian government billions of dollars in additional tax revenue after some people and businesses rushed asset sales to get ahead of it.

Prime Minister Justin Trudeau signalled in April that the government would raise the capital gains inclusion rate, which is the percentage of a gain that’s taxed, on June 25, 2024.

The government estimated that the increase would result in $10.3 billion (US$7.2 billion) in extra revenue in the current fiscal year and the next one.

The policy change caused a number of companies and investors to sell assets ahead of that date so that their gains would be taxed at the old, lower rate. There was a “greater volume of capital gains” than normal, a spokesperson for Canada’s finance department said in a statement.

But the government was never able to pass the capital gains hike into law. Trudeau announced his resignation on Jan. 6 and suspended Parliament, killing the legislation. The two leading candidates to replace him as head of the Liberal Party, Mark Carney and Chrystia Freeland, have said they’d cancel the increase, and Conservative Leader Pierre Poilievre, whose party is leading in pre-election polls, also is against it.

As a result, the government said last month that any increase to the capital gains rate would be deferred until January 2026.

The deferral means the government will forgo $1.7 billion in expected revenue in the current fiscal year and $2.6 billion in fiscal 2025-26, the finance department said.

A department spokesperson cautioned that those estimates were made at a different point in time than the initial April estimates of the tax windfall. In other words, it will be months before the government is able to say precisely how much extra revenue it got from the higher volume of capital gains.

Trudeau’s government — including Freeland, who was finance minister at the time — originally pitched the change as a way of redirecting money from the wealthy toward social programs and “improving tax fairness.”

It said the hike would affect only the richest 0.13% of Canadians, but small business owners, doctors and other groups pushed back on that estimate, saying they’d be hit too.