The International Monetary Fund (IMF) has weighed in on Prime Minister Justin Trudeau’s capital gains tax hike, stating that while the measure improves the system’s neutrality and won’t significantly harm investment or productivity growth, his government must do more to boost revenue and tighten fiscal policy.
A Modest Rise in Deficits
The IMF found that a modest rise in federal and provincial deficits during calendar 2023 and 2024 is unlikely to have a significant impact on the economy. However, it emphasized that some additional fiscal consolidation would help stabilize inflation and restore fiscal space used during the pandemic.
Fiscal Track Record Remains Strong
The IMF noted that Canada’s fiscal track record continues to compare favorably to many other advanced economies. The country was quick to consolidate after the pandemic, has maintained relatively low deficits since then, and is targeting further deficit reduction.
Debt Remains Low in International Comparison
Although debt remains low in international comparison, further consolidation will put Canada in a stronger position to address future downturns as well as structural spending needs related to climate, defense, healthcare, and other critical areas.
Capital Gains Tax Hike: A Start but Not Enough
The increase to the capital gains tax inclusion rate from one-half to two-thirds has drawn ire from businesses that say it will worsen an already dismal investment landscape. However, the IMF found that outcome is unlikely. The new inclusion rate will apply to all gains made by companies, with some exceptions, and gains of more than $250,000 by individuals, starting June 25.
Finance Minister Freeland’s Motion
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. The measure is necessary to raise money for housing and other government programs, according to Freeland.
Underlying Challenge of Boosting Supply Remains
The IMF suggests that 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.
Carbon Pricing: Essential for Climate Goals
The IMF also weighed in on a persistent source of political debate in Canada: carbon pricing. The organization said that carbon pricing is essential in delivering on Canada’s commitment to reduce 2005 emissions by 40-45% by 2030. Calls to replace the fuel charge with technology subsidies "would imply substantially higher costs of achieving climate goals."
Better Coordination and Transparency Needed
The IMF suggested that better coordination of Canada’s many federal and provincial policies promoting carbon abatement could improve cost effectiveness. Additionally, it encouraged greater transparency from officials, saying the Bank of Canada ought to consider publishing more information about its forecasted policy rate path.
In conclusion, while the capital gains tax hike is a step in the right direction for raising revenue, the IMF emphasizes that Canada needs more work from governments to address pressing issues like housing and climate change.
