Capital Gains Tax Hike Won’t Deter Investment, Quebec Minister Says

(Bloomberg) - Quebec's finance minister says Canada's increase to the capital gains inclusion rate is "reasonable" and won't hamstring investment.

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"The inclusion rate in Canada has always been between 50% and 75%. It's now going to be 66%. It's reasonable," said Eric Girard at the Bloomberg Canadian Finance Conference in New York on Wednesday.

"When you have an imbalance between revenues and expenses, there are no easy choices. Some people can say they don't want this tax to be increased, but they have a responsibility to suggest which other tax they would raise."

Prime Minister Justin Trudeau's government announced in its April budget it would boost the capital gains inclusion rate to two-thirds, from one-half previously, to raise funds for housing and social programs. Many business leaders and economists argue the tax hike will harm investment at a time when Canada is already in a productivity crisis.

Soon after the federal budget, Quebec's right-wing government said it would align its tax system with Canada's and increase the capital gains inclusion rate to 66%.

Asked Wednesday whether the tax increase would impact productivity, Girard said he wasn't concerned.

"Investment decisions ... are based on economic potential, and Canada has fantastic potential," he said, pointing to the country's natural resources and educated labor force.

"Investments are not based on the taxation rate at the end of the project. They may be influenced at the margin by this, but good projects can still go ahead, and should go ahead."

Laurent Ferreira, chief executive officer of National Bank of Canada, told Bloomberg in April that the capital gains tax hike "does not send the right signal for risk-taking, for investments, innovation or long-term wealth creation and ultimately for the social fabric of our country."

The Quebec government has estimated the tax increase would raise C$3 billion ($2.2 billion) over five years for the province.

Subsequent analyses of overall revenue from the tax, however, suggest it won't generate as much cash as originally predicted.

Last week, the C.D. Howe Institute estimated it would net less than 40% of the C$8.8 billion in additional personal income tax revenues forecast by the government in Finance Minister Chrystia Freeland's budget.

The parliamentary budget officer, meanwhile, has said the increased tax will add just C$5.8 billion to personal income tax revenues.

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