Policy Forum: The Real Concentration of Capital Gains in Canada—A Longitudinal Analysis

Abstract

It is generally believed that the preferential treatment of capital gains for personal income tax purposes benefits primarily high-income taxpayers. However, since traditional tax statistics include capital gains in the total income of individuals, some individuals see their annual income artificially inflated by the one-time realization of a capital gain. The authors use Statistics Canada's Longitudinal Administrative Databank to better identify who really benefits from the preferential treatment of capital gains in Canada and to determine their frequency of realization. Specifically, the authors measure the shift of taxpayers between five income groups depending on whether or not their capital gains are considered in their total income. While wealthier taxpayers do benefit disproportionately from the preferential treatment of capital gains, the exclusion of capital gains from total income significantly reduces this disproportion. Taxpayers with more modest incomes benefit more than one would expect from the preferential treatment of capital gains, especially when they are over 55 years old. Taxpayers with higher incomes also realize capital gains more frequently than those with lower incomes. That said, among taxable capital gain filers only, this gap is much smaller, indicating that once taxpayers report capital gains, they tend to do so frequently. Taxpayers who report capital gains with regularity remain a minority, although they realize a large share of the total value of capital gains.

Keywords: Capital gains, taxation, analysis