How much more tax will Ottawa levy, and how much will come from the dead?
Institute for Research on Public Policy (IRPP)
Improving public policy in Canada by generating research, providing insight and informing debate.
Deceased taxpayers represent less than one per cent of those declaring gains but could generate between 14 and 26 per cent of additional tax revenues.
How much will Ottawa pocket from capital gains reform? And how much will deceased taxpayers contribute?
The first article in this series profiled taxpayers with capital gains of $250,000, targeted by the reform introduced in the 2024 federal budget. The second focused on the frequency and size of large capital gains among Canadian tax filers. The third part of our analysis concludes with a look at the expected revenues from the proposed reform and the share coming from taxpayers who died during the tax year.
These revenues can be estimated by simulating the additional revenues the federal government would have received if the new tax structure had been in place from 2017 to 2021, with no change in taxpayer behaviour. In this case, the capital gain would have been subject to a progressive inclusion rate based on its size, i.e. 50 per cent up to $250,000, and 66.67 per cent beyond that, with the existing exemptions for the sale of the principal residence, shares in small and medium-sized businesses or farming and fishing businesses, transfers of property upon death, as well as new arrangements for entrepreneurs.
The idea is not to model capital gains growth in 2024 and beyond, nor to offer a precise estimate of the sums that could be raised by the proposed reform in the future. Nor is it a model of the behavioral changes that would likely occur under a capital gains tax structure different from the one that prevailed between 2017 and 2021. There is limited literature on the magnitude of such behavioural effects in the Canadian context, and opinions differ among experts.
Instead, the objective is to carry out a simple mechanical simulation of the additional revenues that would have been collected if the reform had taken place a few years ago. The exercise, while imperfect, nevertheless gives an order of magnitude of potential tax inflows and enables us to assess whether the federal government’s estimates are realistic.
Newly taxable capital gains increased significantly between 2017 and 2021 in Canada, from just over $4 billion to almost $11 billion. This is why the estimate of additional revenue rises from $1.3 billion in 2017 to $3.4 billion in 2021. By comparison, the federal Department of Finance estimates that the inclusion rate change alone will increase personal income tax revenues by approximately $1.8 billion in 2027-2028 and $2.3 billion in 2028-2029. (Preceding fiscal years are marked by a high degree of variability in revenues, likely due to the acceleration of certain asset sales or transfers). Our simulations therefore show revenue comparable to the numbers presented in the 2024 budget for when the new fiscal measure reaches maturity.
Tax contributions of the deceased
Taxpayers who die during the tax year represent between 0.78 per cent and 0.84 per cent of tax filers between 2017 and 2021, but they generate between 14 per cent and 26 per cent of newly taxable gains. Their share of additional tax contributions is virtually identical to their share of additional taxable income, since the vast majority of these gains are taxed at the highest rate of the federal tax schedule. Similarly, the average additional income per new contributor is much greater for the deceased than for the living.
A significant proportion of the revenue from this reform of the tax treatment of capital gains will come from the deceased. From this perspective, while some critics argue that it may be problematic to tax taxpayers more on one-off capital gains (due to the deferred nature of capital gains taxation), this problem is clearly less acute for the deceased. It must be understood that, in the Canadian context, the deemed disposition at death and the capital gain it generates constitute a form of tax on inheritance.
From a life-cycle perspective, most deceased individuals have long begun, if not completed, the liquidation of their accumulated retirement assets, whether a business or a non-residential property. The greater inclusion of a portion of large capital gains at death mostly affects people with large estates. Capital gains taxation at death is therefore unlikely to harm savings in general.
A more detailed version of this three-part analysis is available on the website of the Chaire en fiscalité et en finances publiques (the taxation and public finance chair) at the Université de Sherbrooke.