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Are large capital gains really so exceptional? And are they spread throughout the population, or are they repeatedly realized by a small group of people?

In the first article in this series, we looked at the main characteristics of taxpayers with capital gains of $250,000, whose taxation was reformed in the 2024 federal budget: who they are, how many there are, how high are their gains, and where do they live. In this second part, we analyze the frequency and repetition of large gains.

A capital gain is a tax that is deferred on the accumulation of several years’ appreciation in the value of an asset. It is therefore relevant to study its distribution over time for the same people. Capital gains taxation does not have the same consequences in terms of reducing income disparities if the capital gain is a one-off source of income rather than a recurring source of income.

Table 1 shows the results for all taxpayers who filed at least one tax return between 2012 and 2021. It should be noted that a significant proportion of these people filed a return in each of these years; that some filed until their death; and that some only started filing during the period covered by the data.

For the entire 10-year period, a total of 32,661,105 separate taxpayers filed returns. Of these, 98.9 per cent had no capital gains of more than $250,000 for the entire period. So, in 10 years, only 1.1 per cent of unique filers – or 359,005 taxpayers – reported a gain of $250,000 or more at least once. This is a relatively small proportion, but larger than the result observed in any given year (e.g. 0.16 per cent in 2019, see first article of the series).

Of the 359,005 taxpayers who realized at least one capital gain in excess of $250,000 over the 10-year period, 84.9 per cent realized such a gain in only one year, while 15.1 per cent realized such a gain several times.

The cumulative average income of those who made at least one gain of $250,000 over the period is much higher than that of those who never made a gain of this magnitude: $288,053 versus $44,740. The gap remains significant even when capital gains are excluded from total income, at $162,234 versus $43,846. Furthermore, in terms of the recurrence of high gains, average annual income, with or without capital gains, increases significantly as the number of occurrences of gains of $250,000 or more over 10 years increases. Income level, even excluding capital gains, therefore appears to be an important predictor of the frequency of large capital gains.

The results in Table 1 show that the size of the average annual gain also climbs with the number of occurrences of gains of $250,000 or more. This result seems to invalidate the hypothesis that most taxpayers realizing a large gain would liquidate a single major asset and spread the taxation of this gain over several years. If this were the case, we would observe a decrease in the size of the gain as the number of occurrences increased.

This was observed in a 2021 study where the average annual gain for people with a single gain over five years was greater than the average gain for people with several gains over the same period. This is also the case in our analysis, for those with a single gain of $250,000: these taxpayers reported gains for 4.1 years on average, which means that they also made around 3 other smaller gains. In both cases, this is compatible with the assumption that gains are spread over several years.

On the other hand, over the whole period, the number of years in which a gain is realized increases directly with the frequency of the number of gains of $250,000 or more. This result suggests that the reform is achieving its objective of targeting large gains, and affecting very few one-off beneficiaries.

In short, the fear that small investors would be greatly affected, raised by certain politicians and various pressure groups, was unfounded. The reform of capital gains taxation did target taxpayers with high incomes and large, recurring gains.

Part 1 in this series: Who are the taxpayers affected by capital gains reform?
Part 3: How much more tax will Ottawa levy, and how much will come from the dead?

A more detailed version of this three-part analysis is available on the website of the Chaire en fiscalité et en finances publiques (the taxation and public finance chair) at the Université de Sherbrooke.