HILL: Alberta government can soften blow of Ottawa’s capital gains tax hike

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Earlier this year, the Trudeau government increased the inclusion rate on capital gains over $250,000 for individuals and on all capital gains realized by corporations and trusts. This tax hike will almost surely have a negative impact on investment and entrepreneurship, but the Smith government can lessen the blow in Alberta.

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In simple terms, capital is money invested in an asset — e.g. a business, factory, intellectual property, stock or bond — to create economic benefit. A capital gain occurs when that investment is sold for more than its original purchase price.

Prior to the tax hike, half the value of a capital gain (50%) was taxed by the government. Trudeau increased this “inclusion rate” to 66% — and that has real economic consequences.

Why? Because capital gains taxes impose comparatively large costs on the economy by reducing the reward from productive activities such as savings, investment, risk-taking and entrepreneurship, which are essential for strong economic growth. Capital taxes are among the most economically damaging forms of taxation for this very reason — they reduce the incentive to innovate and invest.

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Take an entrepreneur, for example, who’s deciding whether or not to risk their own capital to provide (and profit from) a new technology, product or service. The higher the capital gains tax, the lower the potential reward from this investment, which means they will be less inclined to make the investment or perhaps undertake the investment elsewhere (another country, for example) in a more tax-friendly environment. Less investment means less innovation, job creation, wage growth and ultimately lower living standards. In other words, Trudeau’s capital gains tax hike will not only hurt Canadians with capital gains but other Canadians who benefit from the knockoff effects of investment.

Largely due to this problem, several wealthy and successful industrialized countries (Switzerland, New Zealand, Singapore) and several U.S. states (including Texas, Alaska, South Dakota, Wyoming) impose no capital gains taxes. Of course, Alberta competes with these U.S. states for investment.

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Previous federal governments also understood the disincentive that comes with capital gains taxes. In 2000, the Liberal government of Jean Chretien meaningfully reduced the tax rate applied to capital gains, stating we must “introduce tax measures that encourage entrepreneurship and risk taking.”

Today, fortunately, the Smith government can take action.

When governments tax your capital gain, they include a share of the gain in your personal income and it is taxed at your personal income tax rate. The Alberta government could simply add a step in the tax return process for Albertans to remove capital gains from the provincial income tax calculation. As a result, the capital gains tax would only apply to the federal portion of your income taxes.

The Alberta government doesn’t have to sit back and accept Trudeau’s capital gains tax hike. Eliminating capital gains taxes from the provincial income tax in Alberta would send a powerful message to potential entrepreneurs, investors and business-owners that the province is open for business — and that benefits all Albertans.

Tegan Hill is director of Alberta policy at the Fraser Institute.

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