Why I Can’t Support the Capital Gains Tax Increase

June 11, 2024

It won’t just affect 0.13% of Canadians as the government claims. In fact, it will affect your doctor, the farmer who grows your food, local small business owners, technology start-up innovators and many others. It is a tax on retirement savings, on small businesses, and on those who don’t have a corporate or government funded pension.

The government bases their assumption that the tax will affect only a few rich people by assuming two things: (1) that people sell their investments frequently and maybe even earn their living from flipping investments; and (2) that investors will all qualify for a $250,000 annual exemption.

(The exemption means that the first $250,000 of a capital gain is taxed at a 50% inclusion rate, and gains above $250,000 are taxed at a 67% inclusion rate. The actual rate of tax is based on your marginal tax rate, which will be at the top end if you are reporting substantial capital gains that year, which will bump your taxable income into higher brackets. The exemption applies only to individuals, not to businesses or professional corporations).

The government assumes most of these investors are wealthy and paying tax at a high marginal rate.

Importantly, the exemption does not apply to investments made through a business, trust or professional corporation. This is where it catches many, many ordinary Canadians.

Who will get caught by this new tax

The government assumptions may be true for a few people. But for many, many people who don’t work for the government or a big corporation, but instead work for themselves in some fashion, they don’t have pension plans. They may not even qualify to contribute to an RRSP if their income isn’t considered “earned income”.

These people – doctors and farmers are good examples and so are tradespeople who contract their services – build up their savings and prepare for retirement with investments, typically using a professional corporation or a small business. Their plan is to sell those investments or companies and use the income for retirement.

It could be stocks and bonds, or it could be a rental property, or land. In many cases, funds are reinvested in their own businesses to build up its value for later resale.

Because these investments are made through the person’s professional corporation, a trust, or a business, they do not qualify for the $250,000 exemption which is only for individuals. Thus, they are now paying 67% on the entire capital gain (rather than the previous 50%), which will dig deeply into revenue that the person had planned to have available for retirement or other purposes (gifting to a child, perhaps).

According to an analysis by economist Jack Mintz, 50 per cent of taxpayers who claim more than $250,000 of capital gains in a year earned less than $117,592 in normal annual income from 2011 to 2021. These include individuals with modest annual incomes who own businesses, second homes or stocks, and who may choose to sell those assets once or infrequently in their lifetimes (such as at retirement). Contrary to the government’s claims, the capital-gains tax hike will affect 4.74 million investors in Canadian companies (or 15.8 per cent of all tax filers).
Globe and Mail, June 11 2024

Discouraging tech innovators from choosing Canada

The new rule will also discourage entrepreneurs, such as tech innovators, who earn their living by building – and then selling – their start-up companies. These clever entrepreneurs can set up their companies and develop their innovations anywhere in the world. Canada is now encouraging them to look for friendlier fields. That is a huge disservice to our children who are preparing for the jobs of tomorrow, and may be forced to look outside of Canada to work at – or build their own – new technology company.

The capital-gains tax hike will also inhibit economic growth during a time when Canadians are seeing a historic decline in living standards. Capital-gains taxes discourage entrepreneurship and business investment. By raising capital-gains taxes, the Trudeau government is reducing the return that entrepreneurs and investors can expect from starting a business or investing in the Canadian economy. This means that potential entrepreneurs or investors are more likely to take their ideas and money elsewhere, and Canadians will continue to suffer the consequences of a stagnating economy.
Globe and Mail, June 11 2024

Impact on property owners or those with inherited property

Many other situations may snag Canadians unexpectedly. Let’s say you inherit a recreational property, land or a business interest from your parents. That property will be appraised at today’s prices as part of the transfer process and capital gains tax may be payable before you take ownership. It is easy to see how a property your parents bought for $25,000 a few decades ago could now be worth half a million or more – well above the $250,000 individual exemption – and therefore subject to a higher capital gains tax by several thousand dollars more than anyone expected.

Capital gains will also apply if you need to sell that inherited property – maybe to provide for your own retirement, to settle a family matter, or you simply can’t afford the upkeep. Again, it is easy to see how an asset that was owned for many years has escalated in value well above the $250,000 exemption.

Even if the land, recreational, rental, secondary property, or a share of a business, is yours – not inherited – it attracts capital gains tax upon sale or transfer (e.g. a gift to your children). It will be appraised and if it has escalated considerably in value, you may be taxed more than you expected when you first purchased the asset. Plan for that when considering how much revenue you will realize from the sale. It might be less than you were anticipating due to higher taxes. If you are gifting – not selling – there won’t be any revenue from the sale from which you can deduct the tax.

Also keep in mind that if you personally own stocks and bonds outside of a registered plan (RRSP, TFSA), they attract capital gains tax upon sale, although in this case, you may be able to spread their sale over more than one year in order to qualify for the annual $250,000 exemption. If they are held in a professional corporation, trust, or business, they do not qualify for the exemption and will be taxed based on a 67% inclusion rate for the entire sale.

Please get professional advice if you are inheriting or selling assets including property and financial instruments. This note is intended only to alert you to possible implications of the increase in the capital gains tax, which may now be higher than you planned for.

A Tax on Inflation

Inflation plays a big part in increasing the value of an asset. Yes – you will pay tax on that inflation. Inflation almost always benefits the government because taxes are generally based on the price of goods and services. When the price goes up, so does the government’s tax haul, such as GST or in this case, the capital gains tax.

François Vaillancourt and Anna Kerkhoff [pointed out] in a recent article in the eJournal of Tax Research, the “failure of capital gains taxes in Canada to account for inflation…. Because the initial capital cost is not indexed for inflation, those paying the tax on realized gains are paying taxes on an increased value owing partially or entirely to inflation and not to an increase in the real value of the asset.”
Financial Post, Sept 19, 2019

In contrast, Australia, the U.K., and the U.S. – which have capital gains taxes similar to Canada’s – have introduced indexation allowances to address the adverse impact of inflation on capital gains.

Negative economic impact on individuals and on Canada

The video below explains clearly why Conservatives can’t support a tax that the govt claims will affect only the ultra-wealthy, but actually will zing seniors, small business owners, farmers, doctors, tradespeople, tech entrepreneurs, investors, builders and many other average Canadians who earn their living or have saved for retirement with investments on which the tax is about to escalate sharply.

The tax may also unexpectedly impact you by hiking the amount of tax due upon the sale of your land, recreational properties, rental properties, business interests, financial investments, or other assets that attract capital gains tax. Note that the tax does not apply to your principal residence.

By discouraging capital investments, the tax will also further damage Canada’s economy which relies – or SHOULD rely – on entrepreneurs who invest their money in new technology (capital investments), business and employment growth, and expanding the size of our economy. This is how we make a country and its people prosperous. Liberal policies have the opposite effect as is shown in the video.

People who earn their living outside of a salaried position for government or big companies have carefully planned for retirement and future expenses using the rules in place. Average Canadians who own properties or small business interests, or stocks and bonds outside of a registered fund, have also planned for the tax payable upon disposition. Those rules are changing, and will retroactively apply to investments made previously – sometimes many years ago.

It’s worth your 15 minutes to understand this issue and how it will impact many more people than the government claims:

The Conservatives’ Promise

Within 60 days becoming Prime Minister, Pierre Poilievre will name a Tax Reform Task Force of entrepreneurs, inventors, farmers and workers to design a Bring it Home Tax Cut that will:

Allow workers to bring home more of each dollar they earn to reward work.
Bring home production and paycheques, by making Canada the best place to invest, hire and make things.
Bring home fairness by reducing the share of taxes paid by the poor and middle class while cutting tax-funded corporate welfare and cracking down on overseas tax havens.
Cutting the paperwork and bureaucracy in the tax system.

Balancing Revenue with Negative Impact on Investment

My questions in the House on June 17 revealed that even one of the smarter finance MPs on the Liberal benches doesn’t understand the history or impact of their capital gains tax hike.

Capital gains tax was introduced to Canada in 1972 with an “inclusion rate” of 50% (meaning that 50% of your return-on-investment must be added to your taxable income in the year you dispose of the asset). The 50% level was chosen to raise revenue but balance the negative impact of the tax on economic growth. For fairness, it was not retroactive to gains realized before the new tax. An estate tax that existed prior to 1972 was abandoned on the grounds that inherited assets would be subject to the new capital gains tax.

The inclusion rate increased to 67% in 1987 and 75% in 1990; then went back to 50% in 2000. Various exemptions have applied over the years as governments try to balance revenue with the negative impact of the tax on Canadians’ investments.

The tension is between the desire to treat income as “a buck is a buck is a buck” (the slogan in 1972) versus the negative impact on both personal and business investment amid the competition for dollars from other countries. Striking the balance matters.

With Canada’s current investment climate in a shambles, it is bad policy to further discourage investment. The lack of retroactivity is just unfair to those who made long-term investments under existing rules.

A better choice would be to restrain runaway government spending so that new revenues are not required.