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Economy

Prime minister’s misleading capital gains video misses the point

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5 minute read

From the Fraser Institute

By Jake Fuss and Alex Whalen

According to a 2021 study published by the Fraser Institute, 38.4 per cent of those who paid capital gains taxes in Canada earned less than $100,000 per year, and 18.3 per cent earned less than $50,000. Yet in his video, Prime Minister Trudeau claims that his capital gains tax hike will affect only the richest “0.13 per cent of Canadians”

This week, Prime Minister Trudeau released a video about his government’s decision to increase capital gains taxes. Unfortunately, he made several misleading claims while failing to acknowledge the harmful effects this tax increase will have on a broad swath of Canadians.

Right now, individuals and businesses who sell capital assets pay taxes on 50 per cent of the gain (based on their full marginal rate). Beginning on June 25, however, the Trudeau government will increase that share to 66.7 per cent for capital gains above $250,000. People with gains above that amount will again pay their full marginal rate, but now on two-thirds of the gain.

In the video, which you can view online, the prime minister claims that this tax increase will affect only the “very richest” people in Canada and will generate significant new revenue—$20 billion, according to him—to pay for social programs. But economic research and data on capital gains taxes reveal a different picture.

For starters, it simply isn’t true that capital gains taxes only affect the wealthy. Many Canadians who incur capital gains taxes, such as small business owners, may only do so once in their lifetimes.

For example, a plumber who makes $90,000 annually may choose to sell his business for $500,000 at retirement. In that year, the plumber’s income is exaggerated because it includes the capital gain rather than only his normal income. In fact, according to a 2021 study published by the Fraser Institute, 38.4 per cent of those who paid capital gains taxes in Canada earned less than $100,000 per year, and 18.3 per cent earned less than $50,000. Yet in his video, Prime Minister Trudeau claims that his capital gains tax hike will affect only the richest “0.13 per cent of Canadians” with an “average income of $1.4 million a year.”

But this is a misleading statement. Why? Because it creates a distorted view of who will pay these capital gains taxes. Many Canadians with modest annual incomes own businesses, second homes or stocks and could end up paying these higher taxes following a onetime sale where the appreciation of their asset equals at least $250,000.

Moreover, economic research finds that capital taxes remain among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. By increasing them the government will deter investment in Canada and chase away capital at a time when we badly need it. Business investment, which is crucial to boost living standards and incomes for Canadians, is collapsing in Canada. This tax hike will make a bad economic situation worse.

Finally, as noted, in the video the prime minister claims that this tax increase will generate “almost $20 billion in new revenue.” But investors do not incur capital gains taxes until they sell an asset and realize a gain. A higher capital gains tax rate gives them an incentive to hold onto their investments, perhaps until the rate is reduced after a change in government. According to economists, this “lock-in” effect can stifle economic activity. The Trudeau government likely bases its “$20 billion” number on an assumption that investors will sell their assets sooner rather than later—perhaps before June 25, to take advantage of the old inclusion rate before it disappears (although because the government has not revealed exactly how the new rate will apply that seems less likely). Of course, if revenue from the tax hike does turn out to be less than anticipated, the government will incur larger budget deficits than planned and plunge us further into debt.

Contrary to Prime Minister Trudeau’s claims, raising capital gains taxes will not improve fairness. It’s bad for investment, the economy and the living standards of Canadians.

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Bjorn Lomborg

How Canada Can Respond to Climate Change Smartly

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From the Fraser Institute

By Bjørn Lomborg

At a time when public finances are strained, and Canada and the world are facing many problems and threats, we need to consider policy choices carefully. On climate, we should spend smartly to solve it effectively, making sure there is enough money left over for all the other challenges.

A sensible response to climate change starts with telling it as it is. We are bombarded with doom-mongering that is too often just plain wrong. Climate change is a problem but it’s not the end of the world.

Yet the overheated rhetoric has convinced governments to spend taxpayer funds heavily on subsidizing current, inefficient solutions. In 2024, the world spent a record-setting CAD$3 trillion on the green energy transition. Taxpayers are directly and indirectly subsidizing millions of wind turbines and solar panels that do little for climate change but line the coffers of green energy companies.

We need to do better and invest more in the only realistic solution to climate change: low-carbon energy research and development. Studies indicate that every dollar invested in green R&D can prevent $11 in long-term climate damages, making it the most effective long-term global climate policy.

Throughout history, humanity has tackled major challenges not by imposing restrictions but by innovating and developing transformative technologies. We didn’t address 1950s air pollution in Los Angeles by banning cars but by creating the catalytic converter. We didn’t combat hunger by urging people to eat less, but through the 1960s Green Revolution that innovated high-yielding varieties to grow much more food.

In 1980, after the oil price shocks, the rich world spent more than 8 cents of every $100 of GDP on green R&D to find energy alternatives. As fossil fuels became cheap again, investment dropped. When climate concern grew, we forgot innovation and instead the focus shifted to subsidizing existing, ineffective solar and wind.

In 2015, governments promised to double green R&D spending by 2020, but did no such thing. By 2023, the rich world still wasn’t back to spending even 4 cents out of every $100 of GDP.

Globally, the rich world spends just CAD$35 billion on green R&D — one-hundredth of overall “green” spending. We should increase this four-fold to about $140 billion a year. Canada’s share would be less than $5 billion a year, less than a tenth of its 2024 CAD$50 billion energy transition spending.

This would allow us to accelerate green innovation and bring forward the day green becomes cheaper than fossil fuels. Breakthroughs are needed in many areas. Take nuclear power. Right now, it is way too expensive, largely because extensive regulations force the production of every new power plant into what essentially becomes a unique, eye-wateringly expensive, extravagant artwork.

The next generation of nuclear power would work on small, modular reactors that get type approval in the production stage and then get produced by the thousand at low cost. The merits of this approach are obvious: we don’t have a bureaucracy that, at a huge cost, certifies every consumer’s cellphone when it is bought. We don’t see every airport making ridiculously burdensome requirements for every newly built airplane. Instead, they both get type-approved and then mass-produced.

We should support the innovation of so-called fourth-generation nuclear power, because if Canadian innovation can make nuclear energy cheaper than fossil fuels, everyone in the world will be able to make the switch—not just rich, well-meaning Canadians, but China, India, and countries across Africa.

Of course, we don’t know if fourth-generation nuclear will work out. That is the nature of innovation. But with smarter spending on R&D, we can afford to focus on many potential technologies. We should consider investing in innovation to grow hydrogen production along with water purification, next-generation battery technology, growing algae on the ocean surface producing CO₂-free oil (a proposal from the decoder of the human genome, Craig Venter), CO₂ extraction, fusion, second-generation biofuels, and thousands of other potential areas.

We must stop believing that spending ever-more money subsidizing still-inefficient technology is going to be a major part of the climate solution. Telling voters across the world for many decades to be poorer, colder, less comfortable, with less meat, fewer cars and no plane travel will never work, and will certainly not be copied by China, India and Africa. What will work is innovating a future where green is cheaper.

Innovation needs to be the cornerstone of our climate policy. Secondly, we need to invest in adaptation. Adaptive infrastructure like green areas and water features help cool cities during heatwaves. Farmers already adapt their practices to suit changing climates. As temperatures rise, farmers plant earlier, with better-adapted varieties or change what they grow, allowing the world to be ever-better fed.

Adaptation has often been overlooked in climate change policy, or derided as a distraction from reducing emissions. The truth is it’s a crucial part of avoiding large parts of the climate problem.

Along with innovation and adaptation, the third climate policy is to drive human development. Lifting communities out of poverty and making them flourish is not just good in and of itself — it is also a defense against rising temperatures. Eliminating poverty reduces vulnerability to climate events like heat waves or hurricanes. Prosperous societies afford more healthcare, social protection, and investment in climate adaptation. Wealthy countries spend more on environmental preservation, reducing deforestation, and promoting conservation efforts.

Focusing funds on these three policy areas will mean Canada can help spark the breakthroughs that are needed to lower energy costs while reducing emissions and making future generations around the world more resilient to climate and all the other big challenges. The path to solving climate change lies in innovation, adaptation, and building prosperous economies.

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Net Zero by 2050: There is no realistic path to affordable and reliable electricity

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  By Dave Morton of the Canadian Energy Reliability Council.

Maintaining energy diversity is crucial to a truly sustainable future

Canada is on an ambitious path to “decarbonize” its economy by 2050 to deliver on its political commitment to achieve net-zero greenhouse gas (GHG) emissions. Although policy varies across provinces and federally, a default policy of electrification has emerged, and the electricity industry, which in Canada is largely owned by our provincial governments, appears to be on board.

In a November 2023 submission to the federal government, Electricity Canada, an association of major electric generators and suppliers in Canada, stated: “Every credible path to Net Zero by 2050 relies on electrification of other sectors.” In a single generation, then, will clean electricity become the dominant source of energy in Canada? If so, this puts all our energy eggs in one basket. Lost in the debate seem to be considerations of energy diversity and its role in energy system reliability.

What does an electrification strategy mean for Canada? Currently, for every 100 units of energy we consume in Canada, over 40 come to us as liquid fuels like gasoline and diesel, almost 40 as gaseous fuels like natural gas and propane, and a little less than 20 in the form of electrons produced by those fuels as well as by water, uranium, wind, solar and biomass. In British Columbia, for example, the gas system delivered approximately double the energy of the electricity system.

How much electricity will we need? According to a recent Fraser Institute report, a decarbonized electricity grid by 2050 requires a doubling of electricity. This means adding the equivalent of 134 new large hydro projects like BC’s Site C, 18 nuclear facilities like Ontario’s Bruce Power Plant, or installing almost 75,000 large wind turbines on over one million hectares of land, an area nearly 14.5 times the size of the municipality of Calgary.

Is it feasible to achieve a fully decarbonized electricity grid in the next 25 years that will supply much of our energy requirements? There is a real risk of skilled labour and supply chain shortages that may be impossible to overcome, especially as many other countries are also racing towards net-zero by 2050. Even now, shortages of transformers and copper wire are impacting capital projects. The Fraser Institute report looks at the construction challenges and concludes that doing so “is likely impossible within the 2050 timeframe”.

How we get there matters a lot to our energy reliability along the way. As we put more eggs in the basket, our reliability risk increases. Pursuing electrification while not continuing to invest in our existing fossil fuel-based infrastructure risks leaving our homes and industries short of basic energy needs if we miss our electrification targets.

The IEA 2023 Roadmap to Net Zero estimates that technologies not yet available on the market will be needed to deliver 35 percent of emissions reductions needed for net zero in 2050.  It comes then as no surprise that many of the technologies needed to grow a green electric grid are not fully mature. While wind and solar, increasingly the new generation source of choice in many jurisdictions, serve as a relatively inexpensive source of electricity and play a key role in meeting expanded demand for electricity, they introduce significant challenges to grid stability and reliability that remain largely unresolved. As most people know, they only produce electricity when the wind blows and the sun shines, thereby requiring a firm back-up source of electricity generation.

Given the unpopularity of fossil fuel generation, the difficulty of building hydro and the reluctance to adopt nuclear in much of Canada, there is little in the way of firm electricity available to provide that backup. Large “utility scale” batteries may help mitigate intermittent electricity production in the short term, but these facilities too are immature. Furthermore, wind, solar and batteries, because of the way they connect to the grid don’t contribute to grid reliability in the same way the previous generation of electric generation does.

Other zero-emitting electricity generation technologies are in various stages of development – for example, Carbon Capture Utilization and Storage (CCUS) fitted to GHG emitting generation facilities can allow gas or even coal to generate firm electricity and along with Small Modular Reactors (SMRs) can provide a firm and flexible source of electricity.

What if everything can’t be electrified? In June 2024, a report commissioned by the federal government concluded that the share of overall energy supplied by electricity will need to roughly triple by 2050, increasing from the current 17 percent to between 40 and 70 percent. In this analysis, then, even a tripling of existing electricity generation, will at best only meet 70 percent of our energy needs by 2050.

Therefore, to ensure the continued supply of reliable energy, non-electrification pathways to net zero are also required. CCUS and SMR technologies currently being developed for producing electricity could potentially be used to provide thermal energy for industrial processes and even building heat; biofuels to replace gasoline, diesel and natural gas; and hydrogen to augment natural gas, along with GHG offsets and various emission trading schemes are similarly

While many of these technologies can and currently do contribute to GHG emission reductions, uncertainties remain relating to their scalability, cost and public acceptance. These uncertainties in all sectors of our energy system leaves us with the question: Is there any credible pathway to reliable net-zero energy by 2050?

Electricity Canada states: “Ensuring reliability, affordability, and sustainability is a balancing act … the energy transition is in large part policy-driven; thus, current policy preferences are uniquely impactful on the way utilities can manage the energy trilemma. The energy trilemma is often referred to colloquially as a three-legged stool, with GHG reductions only one of those legs. But the other two, reliability and affordability, are key to the success of the transition.

Policymakers should urgently consider whether any pathway exists to deliver reliable net-zero energy by 2050. If not, letting the pace of the transition be dictated by only one of those legs guarantees, at best, a wobbly stool. Matching the pace of GHG reductions with achievable measures to maintain energy diversity and reliability at prices that are affordable will be critical to setting us on a truly sustainable pathway to net zero, even if it isn’t achieved by 2050.

Dave Morton, former Chair and CEO of the British Columbia Utilities Commission (BCUC), is with the Canadian Energy Reliability Council. 

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