Capital gains tax hike pushes Canada down on global ranking

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Canada has fallen in a global ranking of tax competitiveness after Ottawa raised the capital gains inclusion rate this year.

The country dropped from 15th to 17th out of 38 countries in the Organisation for Economic Co-operation and Development on the International Tax Competitiveness Index.

The annual index, released by the Washington, D.C.-based Tax Foundation, measures how competitive and neutral a country’s tax code is compared to other OECD nations.

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Canada’s decision to hike the capital gains inclusion rate from half to two-thirds was cited as one of the reasons for its decline in the ranking.

In this year’s federal budget, Ottawa announced that the inclusion rate would rise to 67 per cent from 50 per cent for individuals with gains over $250,000 in the year. Corporations and trusts are subject to the higher rate on all gains.

The Tax Foundation refers to capital gains taxes as a “form of double taxation of corporate profits that contribute to the tax burden on capital.”

“Generally, higher dividends and capital gains taxes create a bias against saving and investment, reduce capital formation, and slow economic growth,” it said in the report.

Other factors that contributed to Canada slipping in the ranking was the adoption of the digital services tax and the phasing out of full expensing for machinery and accelerated investment incentive for buildings.

The Montreal Economic Institute says the tax ranking confirms that Ottawa’s recent tax measures have made Canada a less attractive place to do business.

“In the midst of a productivity crisis, Canada should be focused on making our tax regime more competitive to attract investment — but instead, we’re moving in the wrong direction,” said Emmanuelle B. Faubert, an economist with the Canadian think tank.

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In a MEI poll taken in July after the inclusion rate was raised, 60 per cent of Canadians thought it would have a negative effect on the economy. Seventy per cent thought the change would not just affect the wealthy, but the middle class as well.

Corporate taxes have the potential to do the most harm to economic growth, says the Foundation — and Canada’s score on those is not stellar.

Canada’s top corporate tax rate is 26.1 per cent, higher than the United States, United Kingdom and the OECD average, according to the index.

Overall, this country places about half-way down the ranking for tax competitiveness, one ahead of the U.S. which placed 18th, even after climbing five spots this year.

Some of the strengths of our tax system, the Foundation says, are low consumption taxes and that Canada does not levy wealth, estate, or inheritance taxes.

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The ink was barely dry on the Bank of Canada’s decision to cut interest rates by 50 basis points yesterday, and economists were already predicting another super-size cut ahead.

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With inflation back on target, the economy weaker than expected and the job market soft, Wednesday’s half-percentage-point cut was a “no-brainer,” said Avery Shenfeld, chief economist for CIBC Capital Markets.

“While is its practice, the Bank eschewed any references to the size of further interest rate moves ahead, with the current 3.75 per cent rate still in restrictive territory, it would take a major turn of events to stand in the way of another 50 basis point reduction in December, driven by the same logic as today’s decision,” he said.

The Bank of Canada cut its outlook for third-quarter gross domestic product growth in the monetary policy report to 1.5 per cent and now expects only 2 per cent growth in the fourth quarter.

“Accordingly, it seems unlikely to us that the 50bp cut today will be a one-off,” said Stephen Brown, deputy North America economist at Capital Economics.

Capital expects the bank to end the year at 3.25 per cent and in the new year continue with smaller cuts until the policy rate reaches 2.25 per cent in mid-2025.

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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