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Policy Forum: Inflation Indexation and Capital Gains Tax Reform

Author

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  • Melville McMillan

    (Department of Economics, University of Alberta, Edmonton)

Abstract

Using data from the Toronto Stock Exchange Composite Index from 1971 to 2020, this article examines the differences between the real increases in purchasing power resulting from capital gains and assessed taxable capital gains, assuming inclusion rates of 50 percent and 75 percent, on assets with holding periods of 5, 10, and 20 years. The analysis shows that partial inclusion of nominal gains poorly approximates real (constant-dollar) capital gains income and typically results in considerable overassessment or underassessment of such income and tax. Hence, it is argued that capital gains should be indexed for inflation in order that individual investments, individual stockholders (and capital asset holders generally), and all taxpayers are treated fairly by the tax system. Also, indexation seems a realistic alternative.

Suggested Citation

  • Melville McMillan, 2023. "Policy Forum: Inflation Indexation and Capital Gains Tax Reform," Canadian Tax Journal, Canadian Tax Foundation, vol. 71(2), pages 415-428.
    • Handle: RePEc:ctf:journl:v:71:y:2023:i:2:p:415-428
    DOI: https://doi.org/10.32721/ctj.2023.71.2.pf.mcmillan
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