The Economic Costs of Capital Gains Taxes in Canada

Capital gains taxes, like all forms of taxation, raise revenues for the government. But capital gains taxes impose significant costs on the economy. The cost of capital gains taxes is not limited to the amount of tax revenue collected. Capital gains taxes impose additional costs on the economy. That’s because they reduce returns on investment and thereby cause individuals and businesses to alter their behaviour particularly with respect to the reallocation of capital, the stock of capital, and the level of entrepreneurship in Canada. The ultimate outcome is less investment and less economic activity.

This essay is meant to provider readers with a general understanding of capital gains taxes, the economic costs imposed by extracting taxes from capital gains, and some basic information about capital gains taxes in Canada and other industrialized countries. As the first essay in a series of collected essays on capital gains taxation in different countries, this essays aims to establish a foundation from which to review the options available for capital gains tax reform, which are detailed in a comparative sense in the rest of the collection.