One of my BC BI panel members rightfully takes aim at a poorly argued piece by the Fraser Institute on capital gains. J. Rhys Kesselman: Getting the facts straight on capital gains tax http://a.msn.com/00/en-ca/BB1dnVG1?ocid=st. I'll add some additional thoughts below

In Canada, capital gains are given preferential tax treatment by being taxed at less than full inclusion. Right now and in general the inclusion rate (the portion of gains that are included for taxation) is 50% (despite panicked rumors in 2016 that the sky was about to fall)

At what rate are capital gains taxed? Your personal income tax rate. So if, say, you live in Alberta and earn $160,000 a year and have, say, $40k in capital gains, you include $20k for taxation and pay a combined federal provincial rate of 42.32 on those included gains

Or another way to look at it is that you pay rate of 21.16% on the full amount of $40k in capital gains. Either is the same. You will pay $8,464 in taxes on the capital gains.

What are the four main rationales for the preferential treatment of capital gains? 1. Relief for inflationary gains. The longer you hold the asset the longer you accrue gains and some of those gains technically would be reduced due to inflation.

In the US, the US applies different rates based on a holding period to address this. So short holding period gains are taxed at a higher rate than gains accrued in a longer holding period. Canada applies the preferred treatment regardless of holding period.

Inflation has been low in Canada for, what, like 25 years now, so a 50% inclusion rate vastly overshoots any inflationary effect. So rationale #1 says the inclusion rate is too high and Canada's approach is a blunt tool for the stated objective. Next.

#2. Is about the lumpy nature of capital gains. When you sell an asset and incur a gain it'll happen in a tax year and those gains can't be smoothed across the holding period of the asset. The result is, if you span income thresholds, you'll pay a higher rate than if smoothed.

The idea of the less than full inclusion is to give rise to some smoothing effect. Of course, again, the inclusion rate is a very blunt tool for this.

And given that the majority booking capital gains are in the highest income tax bracket to begin with there is little evidence that smoothing is actually an issue from a fairness standpoint since even if smoothed across, say, several years they'd likely still pay the same rate.

So here again we see that there is little evidence that the application of the inclusion rate matches the objective stated with the problem outlined in #2. A better approach could be averaging, but there is little evidence the tax liability would change. Next

#3. Partial relief for double taxation of corporate profits. Oh whoa is me to be the rich argument. This is a bit complicated, but it really kinda boils down to are capital gains treated similarly to dividends, with some complicated acronyms and tax avoidance techniques

Bottom line is that the capital gains inclusion rate again is too high and has not kept pace with the dramatic reductions in corporate projects means that capital gains have a tax preference over dividends without factoring in other shenanigans. So next.

4. Last, but not least, and is a main point of Rhy's piece is about risk taking and fostering economic growth. Well, my friends, again the inclusion rate writ large, like all of Canada's innovation policy is a blunt and poorly targetted tool

We've had low inclusion rates (between 2/3 and 50%) for a long time. We've had low innovation and productivity for a long time. It is time to give up the ghost on this one. /Fin