The International Monetary Fund (IMF) says Prime Minister Justin Trudeau’s capital gains tax hike improves the system’s neutrality and won’t significantly harm investment or productivity growth, but his government must do more to boost revenue and tighten fiscal policy.
The increase to the capital gains tax inclusion rate — to two-thirds from one-half — has drawn the ire of businesses that say it will worsen an already dismal investment landscape. In its concluding statement of a staff mission to Canada, the IMF found that outcome is unlikely.
However, it said Canada should consider other measures, such as boosting the goods and services tax rate while raising a related tax credit to shield the poor. Tighter fiscal policy would aid the Bank of Canada’s efforts to cool inflation and restore buffers that existed before the pandemic, it said.
“Canada’s fiscal track record continues to compare favorably to many other advanced economies — it was quick to consolidate after the pandemic, has maintained relatively low deficits since then, and is targeting further deficit reduction,” the IMF said in the statement.
“That said, and against the backdrop of a modest rise of federal and provincial deficits during calendar 2023 and 2024, some additional fiscal consolidation would not only help stabilize inflation but also help to restore fiscal space that was used during the pandemic.”
Debt remains low in international comparison, but further consolidation will put Canada in a stronger position to address future downturns as well as structural spending needs related to climate, defense, health care, and other critical areas, the IMF said.
Finance Minister Chrystia Freeland introduced a motion in the House of Commons on Monday to begin the legislative process of hiking the capital gains tax, first announced in April’s budget. The new inclusion rate will apply to all gains made by companies, with some exceptions, and gains of more than C$250,000 by individuals, starting June 25.
She has said the measure is necessary to raise money for housing and other government programs. “Canada could finance these investments by taking on more debt, but that would place an unfair burden on younger generations,” she said at a news conference Monday.
Lawmakers are expected to vote on the motion as soon as Tuesday.
The IMF suggests the bleak homeownership outlook for young Canadians requires more work from governments. New restrictions on temporary visas, such as those for international students, will help ease some of the pressure, but “the underlying challenge of boosting supply remains.” All levels of government could do more to promote social housing, it said.
The report also weighed in on a persistent source of political debate in Canada: the carbon tax. The IMF said carbon pricing is of essential importance in delivering on Canada’s commitment to reduce 2005 emissions by 40 per cent to 45 per cent by 2030. Calls to replace the fuel charge with technology subsidies “would imply substantially higher costs of achieving climate goals.”
Better coordination of Canada’s many federal and provincial policies promoting carbon abatement could improve cost effectiveness, it said.
“A holistic review of the system should be considered, along with the creation of a single body to advise the government on climate policy,” it said.
The body also encouraged greater transparency from officials, saying the Bank of Canada ought to consider publishing more information about its forecasted policy rate path.
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