Faced with pushback from doctors and business owners over the upcoming increase in the capital gains inclusion rate, Prime Minister Justin Trudeau and his deputy Chrystia Freeland are sticking with their plan to target Canada’s highest earners.
In their respective press conferences on Tuesday, both Trudeau and his finance minister defended their proposal to raise $19.3 billion over the next five years by increasing the capital gains inclusion rate (the portion of capital gains over the taxes are paid) for people with more than $250,000 in capital gains in a year.
This new revenue stream comes as the federal government plans to spend billions of dollars to increase Canada’s housing supply and improve social programs; Liberals believe the new revenue will help offset those investments in a way that is fair and doesn’t waste more money. deficit in the younger generations.
“At a time when young people have started to give up on the dream of one day being able to own a home, it was really important to rebalance the situation,” Trudeau said, speaking to reporters in Saskatchewan.
“I understand that this may cost some people more if they are selling a cabin or a secondary residence. But young people still cannot buy their primary residence.”
What is the capital gains tax change?
As revealed in last week’s federal budget, the capital gains inclusion rate will increase from 50 per cent to 67 per cent, and will also apply to all capital gains made by corporations and trusts.
That means that starting June 25, people with more than $250,000 in gains from asset sales in a year will have to pay taxes on a larger portion of that money.
This upcoming amendment to the Income Tax Act is expected to affect the richest 0.13 per cent and approximately 12 per cent of Canada’s corporations and Canadians with an average income of $1.42 million.
The inclusion rate for capital gains earned annually up to $250,000 is unchanged, the existing capital gains exemption on principal residences will remain in place, and the lifetime exemption limit for small business stocks, as well as agricultural and fishing property, is increasing.
What is the criticism?
While it is not the direct wealth tax or excess profits taxes that some had anticipated (as Freeland dodged questions about whether those were revenue routes the government was considering) since the budget was presented, many Canadian business owners and entrepreneurs have expressed concern that the measure could hinder innovation.
“At a time when our country faces critically low productivity and business investment, our political leaders are failing our country’s entrepreneurs,” Shopify President Harley Finkelstein wrote in a post on “X” last week.
On Tuesday, the Canadian Medical Association also spoke out against the move and asked the Liberals to reconsider as the change will impact doctors’ retirement savings as most incorporate and operate their practice as a small company.
PBO warns of ‘collateral damage’
It’s this kind of potential for “collateral damage” that Canada’s parliamentary budget officer, Yves Giroux, expressed caution about in an interview on CTV News’ Power Play program Friday, with host Mike Le Couteur.
Citing the sale of secondary residences such as cabinsor rental properties in the current real estate market as examples of how Canadians might feel the impact of this tax change, Giroux said it is not unusual for capital gains to be realized “well above $250,000.”
“The moment you have a capital gain over a quarter of a million, then you are captured by that higher capital gains inclusion rate,” he said.
The PBO also warned that it is difficult to determine, based on the government’s current figures, whether they will actually be able to generate the amount of revenue expected, but its office plans to evaluate it over the next two weeks.
What is the liberals’ reasoning?
In defending capital gains reforms, both Trudeau and Freeland said the way the tax system currently works means a nurse, a student or a carpenter could be paying income taxes at a higher marginal rate than a billionaire who can use accountants to pay a lower tax rate. .
“That’s not fair,” Freeland said in Toronto on Tuesday. “It’s fair to ask those who are doing very well to contribute a little more.”
In the budget, the Liberals highlighted that this change will not affect 99.87 per cent of Canadians. Additionally, the 416-page document notes that in 2021, only about five per cent of Canadians under the age of 30 made any capital gains.
And next year, 28.5 million Canadians are expected to earn no capital gains income, while three million are expected to earn capital gains below the $250,000 annual threshold.
In an interview on CTV’s quiz show with Vassy Kapelos that aired Sunday, Conservative Deputy Leader Melissa Lantsman did not say whether her party would reverse the increase in the capital gains inclusion rate.
With files from Spencer Van Dyk of CTV News