One economist says Canada needs more tax certainty, following the federal government’s move to raise the inclusion rate on capital gains taxes for corporations and some high-earning individuals.
Finance Minister Chrystia Freeland tabled the federal government’s 2024 budget on Tuesday. The government announced in the budget that it intends to raise the inclusion rate on capital gains taxes from one-half to two-thirds for all gains realized by corporations and trusts. However, the newly announced rate would only apply to individuals with gains above $250,000.
“If every year we get a budget that changes the tax landscape and is picking arbitrarily winners and losers, I feel like that uncertainty might be really the factor that limits future investment,” James Orlando, the director of economics at TD Bank, said in an interview with BNNBloomberg.ca Wednesday.
“It’s a matter for businesses, you just need to have that level of certainty before you’re able to commit to investment.”
He added that many economists would like to see a larger degree of certainty surrounding the nation’s tax system, as Canadians are already subject to high taxes.
The announced changes to Canada’s tax system are expected to generate $21.9 billion in revenue over five years, according to the budget. The new capital gains rules would take effect June 25 and be implemented through amending the Income Tax Act.
Daren King, an economist at National Bank, said in an interview with BNNBloomberg.ca Wednesday that the tax increase will remain marginal for the working-class population but will have a large impact on fiscal planning for investors and businesses.
“I think that (it) will have an impact on entrepreneurs, investors and businesses overall. I think that was probably one of the best ways to increase tax revenue without affecting too much investment by businesses,” he said.
While announcing the tax hike, the Department of Finance said capital gains tax benefits in Canada are more pronounced than any other country in the G7. It also highlighted that firms in the U.S. pay corporate income tax on 100 per cent of their capital gains.
However, Orlando said that the U.S. has no issues attracting capital and investment, as investors worldwide want to invest their money into the country.
“Canada, we don’t have that same situation, whereas we need to incentivize people and businesses to invest here,” he said.
Canada is already having difficulty attracting investment, Orlando said adding that the recent move to raise taxes could make it even more difficult.
Geoff Phipps, a trading strategist and portfolio manager at Picton Mahoney Asset Management, said in a statement to BNNBloomberg.ca Tuesday that the increases to the capital gains inclusion rate is the most significant part of the budget that was not previously announced.
“This change may exacerbate already weak capital investment in a slowing economy. There also isn’t much in this budget to address stagnating productivity growth in the Canadian economy,” he said.
Soyoung Kim, a senior wealth consultant at Edward Jones Canada, said that given the complexity of the measures, she recommends speaking to a financial advisor to optimize future investment decisions.
“The items proposed in this latest federal budget could have lasting impacts on the financial strategies of many households and businesses,” she said in a statement Tuesday.
‘Trigger gains’
John Oakey, the VP of taxation at CPA Canada, said in an interview with BNNBloomberg.ca Tuesday that the federal government’s announcement could spur moves to solidify gains before the new rules take effect.
“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 of the two-thirds,” he said.
Colin White, portfolio manager and CEO of Verecan Capital Management said in a statement to BNNBloomberg.ca Tuesday that the change “allows for a last kick at the can to trigger gains before the change takes effect.”
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