Leaning hard on messaging about taxation fairness, the Government of Canada announced June 10, while the Honourable Chrystia Freeland, deputy prime minister and minister of finance, tabled the Notice of Ways and Means Motion in the House of Commons, that the capital gains inclusion rate will in fact increase from one-half to two-thirds on annual capital gains over $250,000 on June 25.
In making the announcement, the government compares and equates income taxes and capital gains taxes, saying Canadians pay tax on the income from their jobs but only pay taxes on 50 per cent of capital gains.
New revenue
“Today it is possible for a carpenter or a nurse to pay tax at a higher marginal rate than a multi-millionaire. That isn’t fair,” Freeland states. “The new revenue will help make life cost less for millions of Canadians, particularly Millennials and Gen Z.” The government further says that the measure only affects 0.13 per cent of Canadians, but will raise $19.4-billion, an amount they say they will invest in housing.
They add that the plan will generate revenues for provinces and territories, as well, again amounts they say those provinces and territories will invest in housing, healthcare, education, childcare and infrastructure.
Business owners are worried
“Today's announcement and the associated rhetoric from government reinforce that the proposed capital gains changes are about politics, not tax fairness. Business owners are deeply worried about the impact the new 66.7% inclusion rate will have on their ability to retire or save for a rainy day,” the Canadian Federation of Independent Business said in a statement following Freeland’s announcement. “More than half (55 per cent) of small business owners believe it will affect the eventual sale of their business, 45 per cent say it will affect the investments they hold privately and 41 per cent say it will affect investments in their incorporated businesses.”
The CFIB also points out that the government gave businesses only two weeks to consider the changes before they came into effect. “This is deeply disrespectful to Canada’s entrepreneurs.”
The new inclusion rate will apply to gains annually above $250,000 by individuals, all capital gains realized by corporations and all capital gains realized “by most types of trusts.”
Lifetime capital gains exemption
The principal residence exemption remains and gains under $250,000 will continue to be taxed at the one-half inclusion rate. The motion also increases the lifetime capital gains exemption to $1.25-million, up from the current $1.02-million on the sale of small business shares and farming and fishing property.
The government also says it is introducing a new Canadian entrepreneur’s incentive that reduces the inclusion rate to one-third on a lifetime maximum of $2-million in eligible capital gains. They say this can be combined with the new $1.25-million lifetime capital gains exemption. The CFIB criticizes this last measure, saying it should be available to all entrepreneurs in all sectors, including farming and fishing. It should include non-founders, to encourage investment in small firms and the federation suggests cutting the 10-year implementation schedule in half.
According to the government’s announcement, draft legislation and details about the incentive are expected to be released in July. They also note that the increased inclusion rate also means that two-thirds of eligible business investment losses on or after June 25 can also be deducted from income. This, they say, “will encourage risk-taking and entrepreneurship.”
Related:
Association calls on government to delay capital gains changes
