ghariton wrote: ↑11 Mar 2019 00:21
One of the original justifications for including capital gains at less than 50 per cent was to account for the effects of inflation. In theory, capital gains should be the difference between disposition and ACB indexed for inflation since acquisition. But that was deemed much too complicated, and a reduced inclusion rate was used instead.
I remember hearing that from my professors too. If it was the reason, then it's a very imperfect way to treat inflation, given that the same rate applies to someone who held an investment for a few months or for a few decades. The Americans have it better, given the short-term and long-term capital gain tax. Still very imperfect though. Whatever the original intent, the capital gain inclusion rate now appears to be a way to deliver approximate tax integration, and with a better approximation than it does for inflation compensation.
Note that money invested for regular income (GICs, bonds, etc.) and dividends are also at the mercy of inflation, and that's without inflation protection. Inflation protection must come from the income derived from the security and it is taxed at a 100% inclusion rate. If an investor puts $1,000,000 in a 5-year bond and gets $900,000 back in inflation-adjusted capital, he/she is expected to cover this inflation loss through fully taxed interest income.
If instead of investing $1,000,000 in a bond, I buy a chunk of a corporation, then why should I then be protected against inflation through a tax incentive? It should be my responsibility to ensure that the combination of dividends and capital appreciation will cover my loss to inflation. If I buy a $1,000,000 painting that appreciates to $1,200,000, then I have the opportunity to derive income to compensate for the tax hit and the inflation. I can rent the artwork out for income, I can hope that it will appreciate faster than inflation, or I can just decide that the extra cost (taxes) is the price to pay for the enjoyment of having it on my wall. Same with a house: I can rent it out or I can get the enjoyment of living in it. We always have a choice to earn or not to earn an income with an asset to cover the inflation erosion. That's true for cash, real estate, a patent, a piece of equipment, etc.
Whatever the original intent, the capital gain inclusion rate is now a way to approximately deliver tax integration and/or a risk premium (in Canada). As a CCPC owner and an investor in Canadian stocks, I'm more concerned about avoiding double-taxation, which the 50% inclusion rate somewhat accomplishes (as per my post above).
We now have the technology to compute ACB-indexation rather easily. If there was a political will, there would be a way. That would open a can of worm though, as inflation has been a way for government to confiscate wealth for a long time. They would have to seriously cut back, or find revenues elsewhere. It would also require that we deal with other unpleasant topics, such as whether we get a capital loss on assets that fail to appreciate at the pace of inflation, whether they be stocks, bonds, artwork, real estate, patents, corporate assets, etc.