People in Canada don’t change how they behave in response to changes in capital gains tax rates. That doesn’t mean they don’t respond at all when they hear word of changes to the regulations governing the tax. Their response is just short-lived. Sobia Jafry, a PhD candidate with the Department of Economics studied how people affected by the tax changes altered their capital gains realization behaviour. Her finding is that tax reforms lead to retiming effects, meaning when, not if people sell, but with no permanent change in gain realization behaviour. Along the way, she also learned how to correct common misunderstanding of capital gains.
“There’s a big misconception, or a fear, that if tax rates on capital gains are going to change, the biggest capital gain event in our life, selling our house, will be taxed,” the specialist in public and household finance explained. “But policymakers have accounted for that. In Canada, there’s a full exemption for gains on the principal residence.”
As a large majority of Canada’s population does not ever earn a taxable gain, they are not directly affected by taxation of capital gains income.
“One fact that surprises many people is that over 70% of capital gains income in Canada is earned by families in the top 10% of the income distribution,” Jafry said. “It’s a form of income that’s predominantly earned by the wealthy.”
Jafry’s study, Death and Taxes: Does the Lock-in Effect Fade when Gains must be Taxed at Death?, draws upon an insight into how capital gains are taxed in Canada. In many countries, people avoid paying taxes on capital gains by holding onto their investments until death. In contrast, when individuals in Canada die, their entire unrealized gains must be taxed. Jafry uses this insight into the Canadian tax system to examine the stock of unrealized gains among living individuals by using the gain realizations of similar deceased individuals. Until now, this stock of unrealized gains generally could not be observed by researchers, but since Canada taxes capital gains at death, Jafry could overcome this problem by comparing the behaviour of living individuals, who chose how much of their investments to sell, with those who had died and whose entire gains were automatically realized. She found that while people do respond to tax cuts by realizing more gains in the short term, there is no lasting change in behaviour. A theoretical prediction generated using the model she developed is that the Canadian feature of mandatory capital gains tax at death makes individuals less sensitive to the tax.
“I used administrative tax data accessed through the secure Toronto Research Data Centre,” Jafry explained. “In the data, we can observe the capital gains that a person realized in any given year, excluding gains from principal residences and registered accounts like TFSAs and RRSPs. The key parameter here is the elasticity of realizations; how much people change their behaviour in response to changes in tax rates. And the surprising result I find this elasticity is very low in Canada. In the long term, raising capital gains tax rates doesn’t lead to strong behavioral responses.”
Jafry’s research agenda is influenced by her earlier experience in industry. Prior to staring her PhD, she gained a decade of experience working in investments and finance, where she actively managed an equity mutual fund and later, managed investments for a public pension fund.
“I’ve had experience managing money in line with people’s investment goals, life stages, and financial plans,” she said. “That background naturally informs the kinds of questions I ask in my research, and I draw on that experience when exploring these issues.”
Her work has attracted attention for its immediate relevance to scholars of economics, finance, as well as tax law. In November 2025 she presented her work at both the Canadian Public Economics Group (CPEG) annual conference in Laval and the National Tax Association’s annual conference in Boston, and is scheduled to present at the James Hausman Tax Law and Policy Workshop in Toronto in 2026. At UofT, she worked with colleague Abdelrahman Amer to organize the LAPUFIR (Labour, Public Finance, and Related Fields) conference. She also co-organized a panel session at the Canadian Economics Association Conference in May.
“At the time, Canada was, and still is, dealing with the tariff situation with the United States. Things were changing quickly, and we invited a panel of experts to discuss what those changes could mean for Canadian tax policy,” Jafry said.
The interest in Jafry’s work comes as no surprise to her dissertation supervisor.
“Her work offers important insights for understanding the revenue consequences of tax rate changes, the optimal tax rate on capital gains, and the inefficiencies in capital markets arising from the lock-in effect,” said Professor Michael Smart.
Jafry’s mix of promoting public awareness with solid evidence and industry experience has extended into her work as a course instructor for the undergraduate course Introduction to Data Analysis and Applied Econometrics (ECO220).
“Students learn a lot when they actually apply the data tools we teach them to real-world problems,” Jafry said. That’s what made the experience exciting for me. My research is interesting to a broad audience, and teaching has helped me learn to explain it clearly.”
Return to the Department of Economics website.
Scroll more news.