The federal government announced intentions to raise the inclusion rate on capital gains taxes for corporations and individuals earning beyond a certain threshold, which will impact wealthy individuals who are benefiting from tax advantages not available to middle class Canadians, according to the Budget 2024.
On Tuesday, Finance Minister Chrystia Freeland tabled the federal government’s 2024 budget which included changes to capital gains taxes. New changes to Canada’s tax system are expected to generate $21.9 billion in revenue over five years, according to the budget. The resulting revenue could partially offset new spending allocated to things like increasing Canada’s housing supply. Tax benefits to entrepreneurs were also included in the budget.
“Budget 2024 announces the government’s intention to increase the inclusion rate on capital gains realized annually above $250,000 by individuals and on all capital gains realized by corporations and trusts from one-half to two-thirds, by amending the Income Tax Act, effective June 25, 2024,” the budget reads.
“The inclusion rate for capital gains realized annually up to $250,000 by individuals will continue to be one-half.”
Around 12 per cent of Canadian companies would be subject to the higher inclusion rate, according to the federal government. While around 0.13 per cent of Canadians with average incomes of $1.42 million are believed to see their personal income tax on capital gains rise due to the proposed amendment.
John Oakey, the VP of taxation at CPA Canada, said in an interview with BNNBloomberg.ca Tuesday some may try to solidify gains while they can under the current rules.
“It will probably result in some planning to try to determine if corporations, businesses or even individuals want to trigger any of their capital gains in anticipation of the June 25 date and do it prematurely to try to get under the 50 per cent inclusion rate instead the two thirds,” he said.
The Department of Finance said that middle-class Canadians will continue to benefit from various exemptions. This includes the $250,000 annual threshold, tax-free savings accounts (TFSAs), the principal residence exemption as well as exemptions for registered pension plans.
An example of how the new rules might apply was provided by the Department of Finance. It said that if a high-income earner in Ontario had a $400,000 salary and gained $300,000 from selling a second property, they would only pay income tax on 50 per cent of that gain under the current rules.
However, under the proposed rules for 2025, that same person would see their payment reach $158,333.
‘Tax fairness,’ business competition
The Department of Finance highlighted that only 0.01 per cent of those under 30 are anticipated to have capital gains income over the $250,000 threshold in 2025.
“Tax fairness is important for every generation, and it is particularly significant for younger Canadians. In 2021, only about five per cent of Canadians under 30 had any capital gains at all,” the budget reads.
Under the current system, the federal government asserts that discrepancies between taxes on income earned from wages, capital gains and dividends favour wealthy individuals.
The Department of Finance also pointed to Canada’s position among its peers regarding capital gains tax benefits, saying those benefits are more pronounced than any other country in the G7.
As the federal government moves to raise capital gains taxes for corporations, trusts and some individuals, it says the hike is not believed to impact Canada’s business competitiveness.
“First, corporations in most other countries, including the United States, pay corporate income tax on 100 per cent of their capital gains. With a two-thirds inclusion rate, corporate taxation in Canada remains competitive,” the Department of Finance said.
Tax hike fears
Oakey said that the $250,000 annual threshold is likely “sufficient enough” that most non-wealthy individuals will not be impacted on a regular basis. However, he added that some middle-class individuals may be impacted when “one-time events occur.”
“So if somebody passes away…That could be a one-time event where there’s enough capital gains collectively to push you above the $250,000 threshold,” Oakey said.
He highlighted that other “one-time” events could include things like disposing of assets while immigrating or selling a business.
“So where Chrystia Freeland has said, ‘there will be no new taxes for the middle class.’ Although this measure won’t impact the middle class on a regular basis, there can still be one-time events that push people in the middle class above that threshold, resulting in a higher tax rate,” Oakey said.
Ahead of the budget’s release, the government had already announced around $46 billion in new spending measures, leading to some fears about a tax increase to offset spending as Freeland promised to keep deficits under control in the budget.
Newly-announced spending measures are intended to increase housing supply, support AI development and increase defence spending.
“They’ll have to raise taxes and push out a bunch of already committed spending from past budgets into future years,” Robert Asselin, a former Trudeau adviser who’s now with the Business Council of Canada, told Bloomberg News ahead of the budget release.
“What else can a government addicted to spending do when faced with exploding debt service costs?”
The government previously increased tax burdens on large firms with a 2022 move to impose a one-time 15 per cent windfall tax on banks earning over $1 billion.
Bloomberg News reported ahead of the budget that corporate taxes currently represent a significant portion of government revenue, standing at about 21 per cent in the 2022-23 fiscal year marking the largest percentage on record since the late 1960s.
Entrepreneurs
The federal government’s 2024 budget also includes incentives for entrepreneurship.
“To encourage entrepreneurship, the government is proposing the Canadian Entrepreneurs’ Incentive which will reduce the inclusion rate to 33.3 per cent on a lifetime maximum of $2 million in eligible capital gains,” the document said.
“When this incentive is fully rolled out, entrepreneurs will have a combined exemption of at least $3.25 million when selling all or part of a business.”
The federal government said the incentive will result in a “one-third inclusion rate” whereby the limit will rise by $200,000 annually beginning in 2025 until it hits $2 million in 2034.
“This additional $2 million incentive will be available to founding investors in certain sectors who own at least 10 per cent of shares in their business, and where the company has been their principal employment for at least five years,” the budget said.
With files from Bloomberg News
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