Projected revenue from capital gains tax falls short of government expectations, says PBO

The Parliamentary budget officer is projecting an increase of $17.4 billion in income tax revenue from 2024-25 to 2028-29 from the Liberal government's increases to the capital gains tax.

In a report released Thursday morning, the PBO's estimates fell short of the government's projected revenues from the tax changes, which were pegged at $19 billion for the same timeframe in the 2024 budget. The PBO said the tax revenue could even be as low as $15.6 billion when factoring in increased volatility.

The added tax revenue was unveiled as a way to cover billions in new spending in the budget.

The increase to the "inclusion rate" on capital gains, which came into effect on June 25, saw an increase from one-half to two-thirds on capital gains above $250,000 for individuals.

The change will tax all capital gains earned by corporations and trusts at the two-thirds rate.

Capital gains from selling a principal residence are tax-exempt.

The PBO used tax returns from the Canada Revenue Agency to calculate the historical ratio of capital gains on the total tax base for individuals, trusts and private corporations. The PBO combined those ratios with its own internal fiscal projections to formulate its latest figures on how much money the tax increase would generate.

A spokesperson for the PBO told CBC News they didn't have concrete data on how many Canadians the tax hike would impact, but hoped to look into it down the road. The government had projected 0.13 per cent of Canadians would pay more in personal income tax on their capital gains as a result of the change.

In its analysis, the PBO said it also accounted for the likely kneejerk response from taxpayers to liquidate assets in the 10 weeks from when the changes were introduced in the budget to the June 25 deadline.

"It was assumed that corporations would see a more significant increase in realized capital gains before June 25, because all their capital gains will be subject to the higher inclusion rate after that date," the PBO wrote. 

"In contrast, individuals have more options to mitigate the impact of the higher inclusion rate over the long term, as only the portion of capital gains exceeding $250,000 in a year is subject to that higher rate."

From there, the PBO said it adjusted its projections downward, assuming a higher bulk of tax revenue coming in those initial 10 weeks than what would otherwise come in subsequent years.

"Capital gains are more volatile than other types of income, which makes them difficult to predict, as they are influenced by numerous factors such as market conditions, economic cycles and changes in tax policy," the PBO acknowledged, noting such volatility could see the total tax revenue as low as $15.6 billion when factoring in elasticity.

It also said certain assets aren't as easily liquidated given the tight timeline of the 10-week window, like real estate, unvested stock options or shares in private corporations.