What you need to know about Poilievre’s capital gains proposal

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It’s hard for political parties to find breakthrough campaign promises in an election overshadowed by a global economic crisis, but Conservative leader Pierre Poilievre’s proposed capital gains tax deferral for money reinvested in Canada managed to prick many ears. Here, the Financial Post looks at the policy, how it would work and whether it could be the economic “rocket fuel” Poilievre claims.

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What is the proposal?

Currently, the capital gain inclusion rate is 50 per cent, meaning half of any profit made from selling stocks, bonds, real estate or other investment is taxable.

Under the Conservatives’ proposed Canada First Reinvestment Tax Cut policy, an individual or corporation that sells an asset can defer paying taxes on capital gains if they reinvest the proceeds in Canada. Examples given by the Conservatives include Canadian businesses, stocks, farms, homebuilding, technology and manufacturing.

The tax deferral would apply to reinvestments made between July 1, 2025, and Dec. 31, 2026. The Conservatives said in a press release that if the policy generates a “major economic boom,” they’ll make it permanent.

The Conservatives note that the current lifetime capital gains exemption limit for the sale of small business corporation shares, farm property and fishing property won’t change, so small business owners and farmers would still qualify for both the new proposed tax break and the existing exemption.

How would it work and how much would it cost?

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In a video explaining the policy, Poilievre said “Canadians will only pay capital gains tax on accumulated gains when they cash out for good or take their money out of Canada.”

Examples of eligible tax break scenarios provided by the Conservatives include a deli owner who sells their business and reinvests the proceeds in a new Canadian company; a manufacturing business that reinvests in a new Canadian factory, or a rental company that sells a building and reinvests the money to build more apartment complexes.

The Conservatives argue the short-term loss in government revenue would be offset by job creation and economic growth. They also said Canadian companies that invest abroad will have a “powerful incentive” to reinvest their money within Canada. In the video, Poilievre claimed when investors do cash out and pay capital gains tax on all investment gains, the “government will still get its share, but later and bigger.”

At a news conference on March 30, Poilievre said the investment credit would cost the government a total of $10.5 billion over two fiscal years: $5 billion in 2025-26 and $5.5 billion in 2026-27.

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Who would benefit from the proposal?

The policy would benefit both individuals and businesses that have been sitting on an appreciated asset and reluctant to sell for fear of the tax hit. Companies in particular would stand to gain from the deferral by unlocking frozen capital and redeploying it to invest in their business, by, say, buying land for a bigger factory or new machinery or technology to increase their capacity.

Real estate developers would be incentivized to start new projects and companies or individuals with investments abroad could be motivated to move capital back into the country.

There is also potential upside for the broader economy, since it could spur investment and unlock otherwise dormant capital — or help eliminate what is known in behavioural economics as the “capital gains lock-in effect.”

The incentive could be a “game changer” as a longer-term or permanent measure, though the initial 18-month window might seem like a gamble to investors, said economist Don Drummond, Stauffer-Dunning fellow at Queen’s University and a fellow-in-residence at the C.D. Howe Institute.

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What are people saying about it?

While the Conservatives haven’t released specific details on how the policy would work or be administered, the responses from business associations and corporate leaders have been largely positive.

Dan Kelly, head of the Canadian Federation of Independent Businesses, said in a post on X that the idea had the potential to really help Canadian small businesses. “Good to see capital gains raised as an election issue. Looking forward to details,” he said.

Franco Terrazzano, Federal Director of the Canadian Taxpayers Federation, said in a statement, “Capital gains taxes are a huge drag on Canada’s economy. Poilievre’s announcement is a big move to encourage more investment, more development and more growth in Canada.

François Brouard, professor of accounting and taxation at the Sprott School of Business at Carleton University, told the Financial Post that while reinvestment in Canada is a valuable objective, defining what qualifies as a Canadian investment and tracking the paper trails of millions of Canadians could be an administrative “nightmare.”

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Brouard gave the example of buying and selling shares in a mutual fund that holds a mix of investments from Canada and other countries. “You will need to trace each of the different investments that will be subsequent to the initial one, and you need to do this for everyone,” he said.

Drummond pointed out that the policy would largely appeal to high-income investors, and that Canadians with more modest incomes already have other tax deferral options available.

“If they have their investments within a tax-sheltered vehicle, an RRSP or a TFSA, they’ve already got the ultimate in capital gains deferral until they have to start taking it out of a RIF,” he said.

• Email: jswitzer@postmedia.com

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