Capital Gains Increase
How it affects investment buying/selling
federal budget 2024
On April 16th, 2024, Canada’s Deputy Prime Minister and Minister of Finance, Chrystia Freeland, announced the Federal Budget. The budget largely focuses on the middle class, addressing the housing crisis, the rising cost of living, and building economic growth in an equitable, inclusive way.
Of the items listed on the budget, the one most important for investing is the Capital Gains increase. The budget notes that the path Canadian’s take to enter the middle class is under pressure. This pressure is caused by the rising cost of living, coupled with economic damage from the pandemic. This has caused younger Canadians to report struggles keeping up with the cost of living more than ever.
To help level the playing field, the federal budget looks at the disproportionate tax system. In 2019, the analysis by the Parliamentary Budget Officer revealed that the top 1% held 24.9% of Canadian’s household wealth. The 2024 budget proposes new measures to make the tax system fairer and ask those higher income earners to pay more of their share. Through this, the government hopes to bring in $21 billion in revenue to invest in building new homes faster, creating good-paying jobs, and incentivizing economic growth.
Tax fairness
Some of the key ongoing actions that the federal government reports includes:
- Lowering taxes on the middle class by cutting the second income tax bracket and increasing the basic personal amount.
- Ensuring the wealthiest pay their fair share by introducing a top tax bracket of 33% for the wealthiest Canadians.
- Modernizing the Alternative Minimum Tax, ensuring the wealthiest Canadians cannot excessively use deductions, credits, and other tax preferences to reduce their fair share.
- Boosting benefits delivered through the tax system such as the CCB and CWB
- Introducing a 2% tax on share buybacks by public corporations in Canada.
- Introducing a new luxury tax on private jets, yachts, and luxury vehicles.
- Ensuring that capital gains from property flipping are treated as business income.
Canadians pay tax on income from their jobs, currently only paying taxes on 50% of capital gains. Capital gains are defined as the profit generated when an asset such as stocks are sold. This is referred to as the capital gains tax advantage.
The changes to capital gains
To make the system more progressive and fairer, the government is increasing the capital gains inclusion rate. The 2024 budget announces their intention to increase the inclusion rate on capital gains realized annually above $250,000 by individuals and on all capital gains realized by corporations from one-half to two-thirds.
The inclusion rate for capital gains realized by individuals will continue to be one-half. The lifetime capital gains exemption will also be increased by $1.25 million, allowing Canadians with eligible capital gains of below $2.25 million to be better off.
The government will maintain the exemption for capital gains from the sale of a principal residence so that Canadians will not pay this tax when selling their home. The government also plans to make sure that homes are lived in, not just assets, by treating capital gains from property flipping as business income.
Finally, to encourage wider participation in entrepreneurship, the government proposes the Canadian Entrepreneurs’ Incentive, which reduces the inclusion rate to 33.3% on a lifetime maximum of $2 million in eligible capital gains. This allows entrepreneurs to have a combined exemption of at least $3.25 million when selling all or part of their business.
Helping the Middle Class Save Tax-Free
Tax-sheltered savings plans allow most Canadians to earn income on their investments tax-free. Eligible Canadians with taxable income of $100,000 in 2023 can contribute $18,000 to their RRSP, $8,000 to their FHSA, and $7,000 to their TFSA.
Investment income, including capital gains, earned in any of these accounts is not taxed. Furthermore, contributions made to an RRSP or FHSA can be deducted from a person’s income in the year they are made, which reduces the individuals’ taxes. Withdrawals made from an FSHA are tax-free.
What is the Effect on Investment Buying/Selling
The federal government projects that 28.5 million Canadians will not have any capital gains income next year, and another 3 million are expected to have proceeds below the $250,000 annual threshold. This means that many Canadian will feel no effect from these changes. They also predict that only 0.13% of Canadians, approximately 40,000 individuals, are expected to see an increase in their taxes on capital gains in any given year. This demographic has an average income of $1.4 million. Finally, the government estimates that only 307k corporations in Canada have capital gains and will be affected by the changes.
The changes are not anticipated to impact business competitiveness. In most other countries, including the United States, corporations pay a corporate income tax of 100% on of their capital gains. The two-thirds inclusion rate keeps Canada competitive in this sphere.
While aimed to support and grow the middle-class, there are those who are concerned about this change to capital gains. Some members of the business community are concerned that expanding the taxable amount will decrease productivity, investment, and entrepreneurship in Canada, despite the changes including the Canadian Entrepreneurs’ Incentive.
They also express concerns that the change has a negative effect for companies already struggling to access funding in a high-interest rate environment. The changes to the tax rate could affect low-innovation sectors who might have taken a risk joining a startup for the opportunity. This is challenged with the idea that if you talk to real grassroots entrepreneurs setting up businesses, tax rates do not often come into their decision. For Canadians struggling with stresses like housing affordability and access to childcare, these changes could provide relief needed to increase productivity.
Overall, the increase to capital gains will have a large effect on the economic sector. By increasing the share that higher-earning Canadians are paying, more money will be filtered into the system, while middle-class Canadians will have access to benefits and exclusions that fit their lifestyle and allow greater inclusiveness in the economic sector.