Financial specialists will confirm it to you: you have to put your money to work. When placed in the right place, these little paper soldiers will sweat for you.
The fact remains that even in the most clever of plans, a dollar will work less hard than a human. If the expression had not already been patented, this could be described as “common sense”.
In the good old days, at least that’s what they said.
In 1971, capital gains were not taxed. Unlike the hourly wage of the worker, the profit pocketed by selling a plex, a chalet or an investment therefore escaped the tax authorities. Faced with this inequity, the chairman of the royal commission, Kenneth Carter, repeated this elementary logic: “a piastre is a piastre is a piastre”.
It therefore reduced – and not abolished – the exception. From 1972, half of the capital gain was taxed. Why maintain part of the advantage? There were two reasons: to protect the investment from inflation and to encourage savings. A third use appeared later: to compensate for the abolition of the inheritance tax.
Subsequently, the exemption continued to shrink, as researcher Luc Godbout of the University of Sherbrooke recalls in a recent analysis1. The taxable portion of the capital gain sheltered from taxation rose to 66.6% in 1989, then to 75% in 1990. But it was reduced to 66.6% in 2000, then to 50% in 2004.
In her last budget, the Minister of Finance, Chrystia Freeland, only returned to the norm of the 1980s. And she thought of small savers. Its decision only affects winnings exceeding $250,000. Below this level, nothing changes.
Income inequalities – after taxes and redistributive measures – have decreased slightly in Quebec since 1976.
However, wealth inequalities have increased. In Canada, the richest quintile has an income 7.6 times higher than the poorest quintile. But for heritage, it has 508 times more2 ! As they say, it’s the first million that is the hardest to earn…
Now let’s look at the capital gain.
In 2017, 56% of capital gains were pocketed by the richest 0.8% of taxpayers. It’s not a slogan, it’s a fact: the majority goes to the 1%, as demonstrated by an in-depth analysis by the Chair in Taxation and Public Finance at the University of Sherbrooke3.
This explains why in 2015, the Quebec Tax Review Commission proposed ending this advantage, if the federal government were to move.
Not surprising that the Legault government has imitated Ottawa to also reduce its deficit.
The liberals’ motivations are also political.
The increased taxation of capital gains appears to be a consolation prize in the face of the bogged down promises to introduce a minimum tax on large companies and a tax on the turnover of web giants. These initiatives led by the OECD are getting bogged down.
Added to this are two other reasons.
First, there is also an electoral necessity.
An improbable liberal victory would involve winning back the youth vote. However, the majority of capital gains in Canada are pocketed by those aged 60 and over. Young people therefore do not feel targeted, even if many of them will find themselves in the same situation later.
Then there is a fiscal necessity. The Liberals have never balanced the budget, nor even presented a plan to return to balance. This year again, they added 58 billion in new spending over five years. The increased taxation of capital, which will generate 19 billion during the same period, serves to reduce this deficit.
What is disturbing is not the Liberal decision, but the impression that the measure serves to finance budgetary recklessness and that the money raised could not be well managed.
The revenue Ottawa hopes to gain from the new capital gains tax rules will come roughly equally from citizens and businesses.
For businesses, however, exceptions are provided. The cap for the capital gains exemption will increase from $1 million to $1.25 million. But there are more losers, deplores the Canadian Federation of Independent Business. She gives the example of small business owners and professional service firms.
The Business Council of Canada also sees it as a disincentive to investment. Why in fact accumulate capital if it will be taxed?
Researchers like Antoine Genest-Grégoire (University of Sherbrooke) and Olivier Jacques (School of Public Health of the University of Montreal, CIRANO), however, maintain that no study confirms this hypothesis. “The capital gains exemption only applies to Canadians. For a foreign investor, this changes nothing. If Canadians refuse to invest, foreigners will do it for them. »
Owners whose retirement plan depends on their plex will also lose. The fact remains that we cannot really speak of an attack on the middle class. For example, for a profit of $400,000, the additional tax will amount to $13,300. Without being trivial, this does not compromise a retirement.
True, we can see a little unfairness in the face of those who have invested in the stock market and who will disburse less than $249,000 per year so that half of their profits remain sheltered from tax. But a tax regime must be analyzed as a whole, and the announcement of Mme Freeland reduces the inequitable treatment of employment and dividend income and somewhat reduces the increase in wealth inequality.
We can also ask ourselves what we want to encourage with the tax system. Yes, people have worked hard to save in a plex and prepare for retirement. But this profit fuels speculation by large investors which worsens the housing crisis.
Finally, let us remember that the exemption on the principal residence remains. Besides, is it normal for this advantage to exist even for a $2 million mansion?
If Ottawa has launched a hunt for the rich, as some claim, it is not being done with such a big caliber.
1. Read Luc Godbout’s analysis in Policy options
2 According to the Financial Security Survey conducted by Statistics Canada, 2019 edition. This figure is an estimate and not an exact measurement.
3. Consult the report from the Chair in Taxation and Public Finance at the University of Sherbrooke
reference: www.lapresse.ca