Federal capital gains tax hike will hurt New Brunswickers

On Tuesday, the Trudeau government tabled its 2024 budget, which—in addition to more red ink—includes capital gains tax hikes. This is bad news for New Brunswickers.

Currently, individuals and businesses who sell capital assets in Canada incur capital gains taxes at a 50 per cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is taxed at the individual or business’ marginal tax rate. The Trudeau government plans to raise this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.

Simply put, this tax hike will hurt New Brunswick’s economic growth prospects and investment climate.

Capital gains are taxed on a realization basis, meaning the investor does not incur capital gains taxes until the asset is sold. Empirical evidence has shown this creates a “lock-in” effect, where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell. This creates a drag on economic growth, as investors hold off selling their assets, preventing capital from being deployed to its most productive use.

Growth is a major concern across the country, especially in New Brunswick. One recent study found New Brunswick’s level of per-worker business investment was third-lowest in Canada in 2021 (albeit slightly improved from 2014), and substantially trailed the average of U.S. states. Investment is key to economic growth, so it’s no surprise that New Brunswick’s growth has recently trailed other provinces including Nova Scotia and Prince Edward Island.

Lagging business investment and slow economic growth will negatively affect New Brunswickers through lower incomes and living standards. Capital taxes are among the most economically-damaging forms of taxation, in part because they reduce incentives to innovate and invest.

Previous governments in Canada understood this. In the 2000 budget, Finance Minister Paul Martin said that a “key factor contributing to the difficulty of raising capital by new start-ups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an acknowledgement of the costs of capital gains taxes.

At a time when New Brunswick and indeed Canada badly need to improve the incentives to invest and grow, the Trudeau government has introduced a damaging tax hike on capital gains. Governments at all levels should focus on improving the investment climate. Unfortunately, this move will make things worse.