One Comment About Taxation – To “Break the Glass” on Productivity, We Must Fix the Capital Gains Lock-in

 

A number of years ago, when I was leading our firm, I was frustrated. We were very busy but we weren’t moving forward as quickly as we should have been. We had too many “good ideas.” Our capital – financial and human – was spread thin across too many projects. Output wasn’t matching effort. When we cut the noise and focused our capital on fewer, higher-impact priorities, productivity improved almost immediately.

 

Our country is like that. We have a serious productivity problem. This is hardly news. For example, since 2015, Canada’s per capita GDP growth has lagged the United States by a wide margin. Output per hour worked trails our largest trading partner by roughly 20%.  And last week, Statistics Canada reported that real gross GDP declined 0.2% in the fourth quarter of 2025.

 

When the Bank of Canada warned – in an unusually blunt speech in March 2024 – that it was time to “break the glass” with respect to our productivity problem, it was acknowledging structural weakness. Capital formation in Canada has been weak for far too long.

 

If we’re serious about responding to that warning, revised tax policy must be part of the solution. One reform worth revisiting is capital gains deferral when proceeds are reinvested into new productive assets.

 

Why? Because capital gains taxation creates what economists call a “lock-in effect.” Investors delay selling appreciated assets because selling triggers immediate tax. I’ve heard this from hundreds of clients over my career. People hold onto aging assets – not because they should, but because the tax friction makes it costly.

 

Some might argue that Canada’s tax laws already provide mechanisms for capital gains deferral like the various corporate reorganization “rollover” rules in the Income Tax Act. Or the narrow applications in sections 44 and 44.1 of the Act. The fact is these rules are narrow, technical and largely inaccessible for ordinary capital recycling. This deliberate policy choice needs to be revisited.

 

Instead, Canada needs a broad mechanism to enable an investor to sell an appreciated asset and reinvest in another productive asset with no immediate tax friction.  There are many countries around the world with similar mechanisms. Examples include the U.S., U.K., India, Germany, Ireland and a host of others. And to be clear, a deferral is not forgiveness. The tax is ultimately paid when capital is consumed or withdrawn – not when it is recycled.

 

Estonia goes further than most countries. It does not tax corporate profits when earned.  It only taxes profits when they are distributed. Estonia’s system is built on capital mobility that encourages retention and reinvestment of earnings into productive assets. This, in effect, is embedded capital deferral buried directly into its corporate system. The result is faster capital recycling, simplified tax compliance, stronger investment dynamics and very competitive business formation.

 

While Canada does not need to copy Estonia wholesale, its underlying philosophy is instructive: do not penalize reinvestment. The eminent economist, Jack Mintz, has written often about a Canadian version of the Estonia model. While some critics are quick to point out why that model won’t work, the simple rebuttal is that indeed it can work if Canada is serious about improving its productivity and thinking outside of the box.

 

During the 2025 election campaign, the Conservative Party campaigned on a limited capital gains deferral if assets that were disposed of were reinvested back into Canadian assets.  While details were sparse, it’s these kinds of ideas that need exploring. Apparently, our current prime minister – Mark Carney – agrees. On page 444 of his controversial book, Value(s), he states that a “tax system to support dynamism must be developed…Consideration should…be given to deferral of capital gains that are rolled over into new investments.” Good idea! Not sure where I’ve heard that old idea before.

 

Notwithstanding, critics will often gravitate back to the basic argument that providing a capital gains deferral benefits higher-income investors. Of course it does. Capital investors are the ones deploying capital. And such deployment drives jobs, innovation, business expansion and start-ups which can all contribute positively to productivity growth helping all.

 

Some critics will also argue that capital gains should be fully and immediately taxable.  Many of those ideas originate from the 1966 Report of the Royal Commission on Taxation which advocated for full taxation of capital gains (at the time, capital gains were not taxable at all). The Commission stated the following:

 

“A dollar gained through the sale of a share, bond or piece of real property bestows exactly the same economic power as a dollar gained through employment or operating a business.  The equity principles we hold dictate that both should be taxed in exactly the same way.  To tax the gain on the disposal of property more lightly than other kinds of gains or not at all would be grossly unfair.”

 

And thus, the famous “a buck is a buck is a buck” line was born from this thinking. I’ve never agreed with that framing. While the economic output may be identical, the risk, time horizon, and capital commitment required to generate capital gains are not. Treating capital gains as identical to other economic sources may feel morally tidy but it ignores the economic inputs required to generate them. Ignoring those inputs distorts incentives.

 

Thankfully, the government of the day rejected the Commission’s recommendation and instead landed on partial taxation for capital gains in 1972 but unfortunately provided very limited deferral opportunities. That basic architecture remains today.

 

So, what’s the result of limited capital gains deferral opportunities? Capital stays trapped in legacy investments, asset turnover slows, entrepreneurial exits are slower and re-investment into higher productivity assets declines.

 

When we improved productivity in our firm, we didn’t work longer hours – we allocated capital better. Canada faces the same challenge. If policymakers truly believe it’s time to “break the glass,” then tax reform must include removing friction from reinvestment.

 

Capital gains deferral isn’t a “loophole”. It’s a productivity tool. And productivity is the only sustainable path to rising living standards.

 

One Comment About Leadership – Good Leaders Make Hard Decisions

 

Real leadership is making the hard decision before circumstances make it for you. 

 

Think about that. And then start making the hard decisions.

 

One Comment About Economics  – Canada’s  Real GDP Growth Declines…Sigh…..

 

As mentioned in the tax section above, Statistics Canada recently released its fourth-quarter 2025 GDP report. Real gross domestic product declined 0.2% in the fourth quarter, after rising 0.6% in the third quarter.

 

On the surface, that may not sound dramatic. But zoom out. On a per-capita basis – which is what actually matters for living standards – the numbers are worse. With population growth recently outpacing economic growth, Canadians are, on average, getting poorer. That is not a talking point. That is math.

 

There’s nothing earth-shattering in the Q4 report. And perhaps that’s part of the problem since it continues to amaze me how few Canadians appreciate just how serious Canada’s productivity problem has become. Weak productivity growth isn’t an academic issue for economists to debate over coffee. It directly impacts wages, living standards, business investment, tax revenues, and ultimately the sustainability of our social programs.

 

Instead, Canadians seem enamored with grandiose promises of “building the fastest growing economy in the G7” and “building at speeds not seen since World War II,” while ignoring the structural rot that long predates the latest political villain of the day.

 

I liken the situation to the “boiling frog” syndrome. If you drop a frog into boiling water, it will try to jump out. But if you slowly increase the temperature, the frog stays – until it’s too late.

 

Canada’s economic temperature has been rising for years. The structural issues:

 

• stagnant productivity
• excessive regulatory burden
• capital flight
• poor competitiveness
• and governments addicted to spending without credible growth strategies

 

These problems will not fix themselves. Reckless spending and rhetorical optimism are not substitutes for reform. At some point, reality catches up.

 

Canadians need to demand better. And that starts with improving financial literacy. Understanding GDP, productivity, deficits, tax burdens, and competitiveness isn’t optional if you want to make informed decisions – personally or politically.

 

Improved financial literacy benefits you, your family, and the country. It also leads to more informed choices at the ballot box.

 

We can either continue pretending everything is fine or pointing fingers at a villain. Or we can acknowledge that shrinking per-capita GDP is a flashing warning light.

 

The clock is ticking.

 

Bonus Comment – From Peter Drucker – The Father of Modern Management – About Making Hard Decisions

 

“Whenever you see a successful business, someone once made a courageous decision.”

 

Exactly. Leaders, make those hard decisions. Figure out what is holding you back from making them.

 

Amazon Books: https://www.amazon.ca/Making-Life-Less-Taxing-Attention/dp/B0GGTNMV2Q/ref=sr_1_1?

Apple Books: https://books.apple.com/ca/book/making-life-less-taking-version-2/id6758958890

Hope you enjoyed this edition of 1-1-1. If you’re not already part of the In the Mood Network, now’s the time. Please sign-up today.  Whether it’s through consulting, coaching, speaking, or writing, my work is about planting acorns: deliberate, principled actions that challenge the status quo and grow into something far bigger. The goal? Bold reform. Stronger foundations. And a country that values hard work and common sense.