Tax experts never seem to stop debating the appropriate taxation of income from investments, whether from capital gains or dividends. Back in the 1960s when the Carter commission was setting down principles they hoped would guide the design of our tax system, the mantra of “a buck is a buck” was a central consideration. Here’s the idea: a dollar of income buys you the same shopping cart of food whether that dollar came from the paycheque from your job or if it came from selling a stock you own. The Carter framework still motivates much tax analysis in Canada, nearly 50 years later.
Implementing “a buck is a buck” was easier said than done. For investment income, the bucks you get back from your investment may already have been taxed at the corporate level before you got them. If you apply corporate tax and then full personal tax on top of that, you’re going to end up taxing that capital income much more heavily than the tax on regular income from your job. That’s why the Carter commission emphasized the need to account for the corporate taxes already paid when we tax investment income on the personal tax form. We do that by taxing capital gains and dividends at lower rates than we do ordinary income from your job. After some calculations to determine those preferred rates on investment income, tax policy-makers can get the total taxes paid on corporate payouts to be roughly equal to what you pay in tax from your regular job.
This preferential treatment of capital gains and dividend income is a frequent target for analysts concerned about inequality. Both the Broadbent Institute and the Canadian Centre for Policy Alternatives have called for taxing investment income at full personal rates. They’re concerned about investment income because it is very concentrated among high earners.
You can see that featured in the “who gets what” chart below. On the left-hand side I show the proportion of individual taxfilers in each income group using 2011 data from the CRA. On the right-hand side I show the share of realized taxable capital gains income going to each of the income groups. Those with $250,000 or more of total income account for only 0.6 per cent of the taxfiling population, but receive 52.6 per cent of taxable capital gains income. Those with income under $100,000 total 94 per cent of the population, but report only 24 per cent of taxable capital gains.
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