Increasing the taxation of capital gains also helps bridge the wealth gap. Wealth is even more concentrated than income: The richest 20% hold more than two‑thirds of the wealth in Canada. However, we don't feel that a direct wealth tax is the right solution because it would pose significant administrative challenges. Governments have little data on the value of Canadians' assets, and they have even fewer when it comes to illiquid and infrequently sold assets. Capital gains tax does away with those information needs, because it only requires the valuation of assets at the time of purchase and sale. Annual taxation of assets also poses liquidity issues, as some assets cannot be split for sale. Capital gains tax also lessens that problem by generating tax liability when the money is there. Relying on an existing tax really brings down the cost of implementing a new measure.
The same logic applies to estates. Canada doesn't collect taxes at death. However, the deemed disposition of property upon death performs a similar function in triggering the capital gains tax. Estate tax is among the most useful for reducing income and wealth gaps, as they fundamentally tax heirs. Amounts received by heirs are not the result of any choice or action on their part. From their perspective, they're the same as winning the lottery. Taxing these bequeathals therefore has virtually no effect on investment or work decisions, and it also limits intergenerational transfer of wealth, a form of inequality that hinders social mobility.
From a tax justice point of view, it seems unfair to us that capital income be taxed half as much as labour income. While some assets appreciate as a result of their holder's work, many assets appreciate as a result of market forces, without the holder being responsible.
The current inclusion rate has also been recognized by several economists as a tax dodging opportunity. The fact that income from capital gains is taxed at a lower rate than dividends creates an incentive to structure one's business to convert income into capital gains. This results in a loss of resources for society. Efficient taxation should encourage people to organize their business based on actual economic benefits, not tax rates.
Capital gains are highly concentrated among high-income individuals, but one has to acknowledge that a considerable portion of those gains are enjoyed by middle-income individuals. In addition to providing an incentive for Canadian entrepreneurs, the government's proposal to exempt from the new inclusion rate the first $250,000 of capital gains earned by Canadians seems to us to go a long way toward addressing this situation. The proposed reform seems to us to specifically target the very small minority of individuals receiving significant gains on a recurring basis. In its current form, it's hard to imagine that the proposed reform will affect individuals who are not in the upper reaches of income distribution. As a reminder, in 2021, the median reported income in Canada was $41,000, and individuals had to earn $139,000 to be among the richest 5%.