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. [Read more…]