Stock Market Reactions and Capital Gains Tax: Evidence from the 1985 Canadian Lifetime Capital Gains Exemption

Abstract

This paper provides evidence suggesting capital gains tax affects stock returns and trading volume. The Canadian federal government budget of May 23, 1985 provided individual taxpayers with a cumulative tax exemption for capital gains, up to a lifetime limit of $500,000. The empirical results, using daily stock return and trading volume data from the Toronto Stock Exchange, show that stock prices decreased three days before the announcement of the lifetime capital gains exemption. The empirical results also show that stock trading volume increased two days and four days before the announcement and five days following the announcement. These results are consistent with the argument that the capital gains tax constrained some individual shareholders from selling appreciated shares (often called “lock‐in effect”).

Citation

Lin, H. and Zeng, T. (2005), "Stock Market Reactions and Capital Gains Tax: Evidence from the 1985 Canadian Lifetime Capital Gains Exemption", Review of Accounting and Finance, Vol. 4 No. 2, pp. 149-164. https://doi.org/10.1108/eb043427