Canada’s Parliamentary Budget Officer (PBO) published an estimate that the increased capital gains inclusion rate, implemented in the 2024 Budget, will boost income tax revenues by CAD 17.4 billion from 2024-25 to 2028-29.
The PBO issued this legislative costing note on 1 August 2024.
The 2024 Budget introduced an increase in the capital gains inclusion rate from one half to two thirds for corporations and trusts, and from one half to two third on the portion of capital gains realised in the year that exceed CAD 250,000 for individuals.
This policy is effective for capital gains realised on or after 25 June 2024.
Estimation and projection method
Using tax returns data from the Canada Revenue Agency, the historical ratio of capital gains on the total tax base was calculated for each of the following taxpayer groups:
- Canadian-controlled private corporations (CCPCs),
- non-CCPCs; and
- individuals and trusts.
These ratios were combined with PBO’s internal fiscal projections from the March 2024 Economic and Fiscal Outlook (EFO) to project forward capital gains realisations over the costing horizon.
PBO’s analysis accounted for a behavioural response due to the introduction of the increased inclusion rate.
A change in the timing of realisations was made to account for the 10-week window taxpayers had to realise capital gains that would still be subject to the 50% inclusion rate.
Considering the limited timeframe for tax planning strategies and the illiquidity of several types of asset holdings:
- The PBO estimated in 2024 a 15% increase in capital gains realisations for corporations;
- A 10% increase in capital gains realisations for individuals and trusts.
Most of the increased realisations in 2024 were assumed to come from assets that would otherwise have been disposed of in the following year, and a smaller portion coming from later years.
The realisations in those following years were adjusted downward accordingly. It was assumed that corporations would see a more significant increase in realised capital gains before 25 June 2024 because all their capital gains will be subject to the higher inclusion rate after that date.
In contrast, individuals have more options to mitigate the impact of the higher inclusion rate over the long term, as only the portion of capital gains exceeding CAD 250,000 in a year is subject to that higher rate.
