I was frustrated a number of years ago when I was leading our firm. We were very busy, we had too many “good ideas” and our capital — financial and human — was spread thin across too many projects. Output wasn’t matching effort. But our productivity improved almost immediately when we cut the noise and focused our capital on fewer, higher-impact priorities.

Our country is like that. We have a serious productivity problem . This is hardly news. Canada’s per capita gross domestic product (GDP) growth has

lagged the United States by a wide margin since 2015. Output per hour worked

trails our largest trading partner by roughly 20 per cent. And real gross GDP declined 0.2 per cent in the fourth quarter of 2025.

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, 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 it triggers immediate taxes. I’ve heard this from hundreds of clients during 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, such as the various corporate reorganization rollover rules in the

Income Tax Act or the narrow applications in sections 44 and 44.1 of the act. But these rules are narrow, technical and largely inaccessible for ordinary capital recycling.

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 with similar mechanisms, including the U.S., the United Kingdom, India, Germany, Ireland and others. 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 The tax is ultimately paid when capital is consumed or withdrawn, not when it is recycled.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 them when they are distributed. Its system is built on capital mobility that encourages retention and reinvestment of earnings into productive assets. The result is faster capital recycling, simplified tax compliance, stronger investment dynamics and very competitive business formation.

Canada does not need to copy Estonia wholesale, but its underlying philosophy is instructive: do not penalize reinvestment. Economist Jack Mintz has often

written about a Canadian version of the Estonia model. Some critics are quick to point out why that model won’t work, but the simple rebuttal is that it can work if Canada is serious about improving its productivity and thinking outside the box.

During the 2025 election campaign, the Conservative Party campaigned on a

limited capital gains deferral for assets that were disposed of if they were reinvested back into Canadian assets. Details were sparse, but it’s these kinds of ideas that need exploring.

Apparently, Prime Minister Mark Carney agrees. On page 444 of his book Value(s), he said 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 that drives jobs, innovation, business expansion and startups, which can all positively contribute to productivity growth, thereby helping all.

Some 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).

“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 commission said. “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.”

The famous “a buck is a buck is a buck” line was born from this thinking. I’ve never agreed with that framing. The economic output may be identical, but 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 it unfortunately provided very limited deferral opportunities. That basic architecture remains today.

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

We didn’t work longer hours when we improved productivity at our firm; 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.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.

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