Introduction

Attention, future Prime Minister of Canada! It's time to slay the lingering zombie tax on capital gains before it rises to haunt our economy again. As it stands, the proposed hike to the capital gains inclusion rate hangs in limbo since Prime Minister Justin Trudeau prorogued Parliament, yet the Canada Revenue Agency is behaving as if the increase, projected to take effect on June 25, is already in play.

The Need for Reform

With the looming April 30 tax filing deadline for 2024, the door remains open for decisive action. Instead of doling out heavier burdens through tax increases, we need bold reforms that tackle two glaring issues: enhancing economic productivity—a critical factor in uplifting wages and living standards—and addressing the chronic unaffordability of housing in Canada.

Current Capital Gains Tax Proposal

The federal budget laid out last April suggested a hike in the capital gains inclusion rate for profits above $250,000 a year from 50% to 66.67%. While framed as a move towards tax equity—especially for young Canadians—this plan has been met with skepticism and pushback from business leaders, who argue that it could stifle innovation and investment.

Economic Productivity Concerns

A recent RBC Economics report highlighted Canada's struggles with productivity, showing it lags 30% behind the U.S., with Canadians earning about 8% less. Given that current capital gains rates have failed to ignite sufficient investment and innovation, a radical shift is warranted. Why not lower the inclusion rate to 33.3%? This could catalyze investment instead of disincentivizing it.

Budget Implications

The government's initial plan aimed to generate a staggering $19.4 billion in revenue through the increased inclusion rates. Yet, cutting the rate could leave a sizable gap in the budget. Here’s the catch: boosting economic activity through incentivizing investments could help offset these losses in the long run, enabling businesses to thrive and create jobs.

Revisiting the Principal Residence Exemption

Additionally, revisiting the principal residence exemption poses a critical opportunity for change. A major issue fueling our productivity gap is a considerable amount of investment locked in real estate. By partially or fully eliminating the capital gains tax exemption on primary residences, we could redefine real estate as a lifestyle choice rather than an investment vehicle. This could dampen speculative frenzies and open up funds for productive investments that stimulate the economy.

Concerns and Clarifications

Anticipating backlash, particularly from seniors viewing their homes as retirement assets, it’s essential to clarify: taxing homes wouldn’t break the bank. Post-tax gains would still be manageable, with only a third considered taxable.

Impact on the Housing Market

Introduce taxes on residential capital gains, and while some might fret, this shouldn't dismantle the housing market—after all, a home is still a fundamental need. Instead, it would alleviate speculative pressures that have exacerbated skyrocketing home prices, potentially setting the stage for more stable and affordable housing options moving forward.

The Path Forward

Building more homes has been touted as the solution to our housing crisis, but let’s be realistic—the process is slow and can suffer from broader economic downturns. Imposing a capital gains tax on homes promises a faster, more effective route to enhancing affordability and reallocating capital within the market. The time for strategic reform is now! Will the next Prime Minister take the plunge?