MONTREAL, April 14, 2022 /CNW Telbec/ -The inflation rate in Canada has been steadily increasing for several months now. The expansionary monetary policies, as well as the economic sanctions accompanying the Russia–Ukraine war, suggest that significant inflation could be with us in the medium to long term. High inflation erodes consumers’ purchasing power and also has a negative impact on Canadian taxpayers, notably through capital gains tax, an issue that MEI researchers examined in their latest publication.
This tax has a direct effect on investment, and multiple ramifications on the commitment of business angels, on entrepreneurship, and especially on the mobility of capital to finance innovation in the economy. After noting how inflation depreciates the value of investments over time, our researchers conclude that adjusting capital gains tax to account for inflation should be at the heart of the debate in Canada.
“Incorporating inflation into the calculation of this tax is not a new proposal, but it has become increasingly important in our current inflationary conditions to keep Canada fiscally attractive,” says Valentin Petkantchin, economist and principal researcher at the MEI. “This is an essential reform if we want to promote investment and prosperity.
“Taking inflation into account is essential for taxpayers who invest. For example, an individual who buys $10,000 shares on the stock market, then resells them ten years later for $20,000will be taxed $1,676 too much, almost 170%, compared to the real value of the gain if the average annual inflation rate is 5%”, explains Olivier RancourtEconomist at the MEI.
The Israeli model and an American invoice
Several solutions exist elsewhere in the world to adjust the purchase price of an asset to inflation. In Israel, for example, the purchase price is indexed to the consumer price index. Thus, the part of the nominal capital gain which is due to inflation is not taken into account when it is taxed. Moreover, once the property has been liquidated, and after indexation, the remainder, representing the real gain, is taxed at a fixed and non-progressive rate.
In United States, US senators have tabled a bill to take inflation into account when calculating capital gains. This method, which consists in taxing only the real gain, would not penalize more those who hold long-term assets than those who hold them for a shorter period.
“Yes United States go ahead with this bill, Canada will have to follow suit to maintain its budgetary competitiveness. But the main advantage of such a reform, beyond the attractiveness of Canada for international investment, is to promote the creation of wealth. According to estimates by the Tax Foundation of United Statesa tax reform to adjust capital gains to inflation would result, among other things, in a cumulative increase in US GDP of 0.11% over time,” concludes Valentin Petkantchin.
The Montreal Economic Institute is an independent public policy think tank. Through its publications, its appearances in the media and its advisory services to political decision-makers, the MEI stimulates debate on public policies and reforms based on a healthy economy and entrepreneurship.
SOURCE Montreal Economic Institute
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