AN INVESTOR INJUSTICE,

SAYS STEPHEN JARISLOWSKY, CANADIAN COALITION FOR GOOD GOVERNANCE DIRECTOR.

In my personal opinion, the current Liberal government’s rumoured plan to increase the capital gains tax can be expected to hammer another nail in the coffin for Canadian investments, particularly at a time when our economic outlook is already relatively weak.

Based on combined federal and provincial tax rates, personal taxation has already reached a maximum level of 53 per cent of taxable incomes. At half this rate, the capital gains tax is now 26.5 per cent in most of Canada.

If the personal tax rate of 53 per cent were the only tax, it would already confiscate over half the income of Canada’s successful entrepreneurs, as well as the persistent savers, who more than pay their way in society and amass the very money that finances existing and new jobs. These high-tax payers pay a materially higher income tax rate than they would if they had chosen to work and live elsewhere. On top of that, should they achieve a gain, when they sell the businesses they have built, they pay capital gains tax at 26.5 per cent.

But is it really at a 26.5-per-cent rate? The answer is no, because this rate becomes a far higher real rate if I were to sell my company. Let me explain. I started my company in 1955 when a cup of coffee cost five to ten cents, not the $2.00 to $3.50 it costs today. Say I sold it now at a hypothetical price of $100,000. But the true cost that I originally invested would need to be multiplied by some eight times to adjust it to real value in today’s dollars. Had I invested $8,000, my cost in today’s dollars would not be $8,000 but $64,000; however, under current rules, no inflationary adjustment is allowed. So, if I had invested $12,500, that cost in today’s dollars would be $100,000 and, based on the sale price, I would in fact have no capital gain as measured by real purchasing value Yet, I would pay $23,187 in capital gains tax, and so incur this as a real loss in today’s dollars. Clearly, the real tax ratio is well above 26.5 per cent of the real gain. In fact it is taxing a real loss.

I do not object to paying 25 per cent of any short-term (one-year) capital gain, but when it comes to gains that include a tax on inflation that occurred over long periods of time, it means severe injury to whatever real gain has been earned. The fair thing would be to establish inflation factors to determine real rather than nominal gains, and base a real tax on a real gain. This is an easy exercise today with computers that can calculate inflation effects instantly for any transaction for which you know the cost date. If the Liberal government raises the capital gains tax rate on long-term “profit,” it would be an even greater injustice to purchasing power, a greater de facto confiscation.

As I never belonged to a Canadian political party in the 67 years that I have been paying taxes in Canada, I have no partisan axe to grind. As a believer that we must look after the less fortunate in our society, I believe in a level of taxation that is fair. I do not believe for a moment, though, that someone who earns $200,000 pre-tax in Canada is “rich.”

On the other hand, I believe that top executives, working for a corporation they did not create, receiving compensation 200 times the average pay in their company, are by far overpaid. Those who build a corporation from scratch and toil years and years (it was 10 years before my company earned $100,000 in 1965, which is $656,470 in today’s money) are fully entitled to the real income on their shares should they succeed rather than fail. They have enhanced the Canadian economy, as I did from nothing, and created jobs.

I would like to add, as a last point, that income tax and the counterproductive capital-and-inflation gains tax are by no means the only money that detracts from building a stronger economy in Canada. We have real estate and school taxes for which we only partly obtain value. Here in Quebec we also have a 15-per-cent sales tax on almost everything we buy, including services. We have gasoline, liquor and many other specific taxes, mostly hidden from view. We also have largely unpunished corruption, which is another cost.

Isn’t it time to examine taxation from the point of view of good governance and what is ethically correct? Should we not look to improve the structures of our democracy and reduce vote-buying as well as the influence of special interests? However, let’s begin by taxing long-term capital gains on real gains — not on nominal inflation gains.

TAXING CAPITAL GAINS WITHOUT ACCOUNTING FOR LONG-TERM INFLATION MEANS SEVERE INJURY TO ACTUAL EARNINGS.