It ain’t so easy being a capitalist

Opinion

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This article was published 29/06/2024 (458 days ago), so information in it may no longer be current.

If you’ve been passively following news about recent changes to capital gains taxation, it might seem as if a huge trauma is being inflicted on taxpayers.

Make no mistake: Venture capitalists, high-net-worth Canadians, entrepreneurs of successful small businesses and, potentially, owners of family cabins are likely facing higher taxation under the rule change.

Yet most folks will be unaffected.

According to the federal government increasing the inclusion rate, from 50 per cent to two-thirds for taxation of capital gains exceeding $250,000 in any given year for an individual, should affect about 0.13 per cent of taxpayers each year.

“That’s about one out of every 700 taxpayers, and yet if you were to judge by the media reaction, it was almost like, ‘The sky is falling!’” says John De Goey, podcaster and author of Bullshift: How Optimism Bias Threatens Your Finances.

The Toronto-based portfolio manager who advises high-net-worth Canadians adds the change to the inclusion rate could affect some clients with non-registered investment accounts.

These are investments not held in Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs) or any other government-sanctioned, tax-sheltered account. As always, capital gains taxation does not apply to registered investments.

The change, however, could affect some real estate owners.

But, to be clear, it will not apply to your principal residence, generally exempt from capital gains taxation.

If you own a cabin, you may need to determine which property — home or cabin — has the highest gain in value to protect using the principal residence exemption.

At its most basic, the change in the capital gains inclusion rate means that on $500,000 of profit from the sale of an asset in a calendar year, only 50 per cent of the first $250,000 ($125,000) would be taxable at your marginal rate.

Of the remaining $250,000 of profit, 66.7 per cent would be taxable. If the asset is held jointly, the profit could be split between spouses, keeping under the $250,000 threshold so the inclusion rate stays at 50 per cent.

The federal government estimates the change will add about $19.4 billion in revenue over the next five years with most of that sum likely from businesses, which cannot use the $250,000 annual threshold.

Some observers have forecast the increase in the inclusion rate, effective June 25 this year, is a disincentive for investing in businesses and will harm the economy already suffering from declining productivity.

This argument is dubious, counters Katrina Miller, executive director of Canadians for Tax Fairness (C4TF) in Toronto.

She explains that the federal Liberals “lowered the inclusion rate to 50 per cent as part of a slew of tax cuts in 2000, based on a belief it would foster more productivity and investment.”

Before then, the inclusion rate had been 75 per cent for taxation on capital gains. A Progressive Conservative government had increased the inclusion rate from 66.7 per cent in 1990 to 75 per cent after previously bumping it up from 50 per cent in 1988. The inclusion rate prior to 1988 had been 50 per cent since 1972, before which capital gains were not taxed at all.

Decreasing the inclusion rate did not boost productivity as forecast, Miller says.

“We’ve actually seen capital investment by companies stall over that period,” she says, citing a recent C4FT report.

She suggests targeted tax credits for purchasing equipment, and research and development are more likely to lead to more capital investment.

What the recent change to the capital gain inclusion rate will do, at least somewhat, is make the tax system more progressively fair — meaning the more you earn, the more tax you pay no matter how it’s earned.

Even after the change, “money made from capital is taxed at a lower rate and because of that, people making most of their income from wages pay more tax (proportionately) than those who are able — and fortunate enough — to earn income from owning assets,” Miller says.

“The increase in the inclusion rate just levels the playing field a bit more.”

For business owners, farmers and individuals with significant investments outside registered accounts, however, the change likely throws a monkey wrench in financial plans, increasing taxes to be paid at some point.

“Retirement, succession and estate plans should be revisited, together with insurance policies that were designed to assist with the tax consequences at death,” says Evelyn Jacks, president of Knowledge Bureau in Winnipeg, providing advanced wealth planning education for financial advisers.

Additional changes—like the increase to the Lifetime Capital Gains Exemption and the new Canadian Entrepreneurs’ Incentive for business owners, along with provisions for capital losses that reduce taxable capital gains—can be meaningfully helpful, says H&R Block tax expert Yannick Lemay in Quebec City.

Another is the capital reserve provision that while not new could help individuals stay under the $250,000 threshold, he adds.

“If you sell a property and don’t receive the full proceeds for it in the year, you’re allowed to extend the capital gain up to five years.”

The bottom line is you could be affected by the recent change, you need tax advice now more than ever, Jacks says.

“The capital gains inclusion rate changes on top of a convergence of other new tax provisions … make compliance under our system of taxation much more difficult, with extremely complex new rules and exorbitant penalties and interest when Canadians get it wrong.”

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com