There was Pierre Poilievre on Sunday, talking about what should be the big issue of this campaign. No, not the latest social-media musings of Donald Trump; rather, the slightly more important matter of how to snap this country out of its current economic doldrums and secure Canadian prosperity in the coming decades.
The Conservative Leader was bang on in his diagnosis of the problem: too little capital investment means lower productivity leading to lower wages, and adds up to an economy more vulnerable to Mr. Trump’s fits of pique.
And Mr. Poilievre was, broadly speaking, correct in his proposed remedy to reduce the taxation of capital gains that result from assets increasing in value.
So kudos, albeit with a few asterisks, to Mr. Poilievre for challenging the tired confiscatory policy drift of the Liberals under Justin Trudeau, where job creators were exhorted to pay just a little more (again and again) in the name of fairness. Meanwhile, productivity stagnated and gross domestic product per capita started to slide. (Liberal Leader Mark Carney has broken with that record in a limited way, including by axing a planned hike in the capital gains inclusion rate.)
The Tory proposal takes aim at the issue of feeble domestic investment, proposing to defer the tax on most capital gains – if the proceeds are reinvested in Canada. The measure would expire at the end of 2026, although the Conservatives say it might be extended if it generates the expected economic boost. The party pegs the first-year cost at $5-billion, rising to $5.6-billion in year two, with that net cost also reflecting expected revenue gains from economic growth. That net cost is substantially less than what the Tories would expend on cutting personal income taxes (a tax expenditure that will do very little to deal with Canada’s productivity woes).
One quibble with the Tories’ portrayal of their plan as unprecedented innovation: there are existing provisions in the tax code that allow companies to defer capital gains taxes on the sale of property and buildings in some instances.
Still, the broad strokes are fine. But the details of the plan are somewhat worrisome – and have the potential to add to Canada’s housing and productivity woes.
To start with, the plan as laid out (admittedly, in a press release) places few restrictions on how individuals can reinvest capital gains while still obtaining a tax deferral. Real estate and shares in publicly traded companies are not excluded, for instance.
For an individual, it would be greatly beneficial to be able to sell a cottage and buy hundreds of thousands of dollars in the shares of a public company without having to cut a cheque to the Canada Revenue Agency. The broader economic benefits are minute, however.
In housing, the Tories are setting the stage, perhaps inadvertently, to trigger a flood of capital into bidding wars for existing housing stock, fuelled by their big tax break. Individuals would be allowed to purchase real estate in Canada and receive a deferral. That policy would be the opposite of what the Canadian economy – where far too much capital is tied up in housing – needs.
It wouldn’t take much of a tweak to turn that downside upside down. If the Conservatives were to exclude real estate as a qualifying asset for reinvestment, they could create a spigot to drain housing capital and redeploy it to much more productive uses. At a minimum, only investment in new housing construction should qualify for the deferral. (Similarly, investments in the stock market should be excluded.)
The Tory proposal does make it clear that corporations would only be able to reinvest in an active Canadian business. The party should go further and specify that firms whose business is buying and selling real estate are excluded.
But the more fundamental critique of the Conservatives is that they are being too timid – although to be fair, they are more bold than their Liberal rivals.
There are bigger steps to take on the taxation of investment that could jolt the Canadian economy out of its malaise. Allowing companies to deduct any dollar spent – including on capital investment – immediately against income would sweep away a disincentive. Ending the indefensible practice of taxing the nominal gains in assets rather than after-inflation returns would be another. Lowering the inclusion rate on capital gains is yet another.
Best of all would be this policy: all of the above, including a suitably tweaked version of the Conservative plan. This is no time for half-measures or modest ambitions.