Federal Budget 2024 | Turning the screw on capital gains: sell quickly to save tax

Cottages, second homes, stocks… You only have about two months left to sell this type of asset before having to pay more capital gains tax – a first turn of the screw of its kind in a quarter century. Tens of billions in profits are likely to be made by then.

Announced Tuesday in Federal Finance Minister Chrystia Freeland’s fourth budget, this decision is expected to generate $19.4 billion over five years, a sum that will be used to finance new government spending. In exchange, the Trudeau government is offering some breathing space to owners of small and medium-sized businesses (SMEs) with tax exceptions.

As of June 25, the inclusion rate – the portion of the capital gain that is taxable – will increase from half (50%) to two-thirds for everything over $250,000. This change is expected to affect some 40,000 people and 307,000 companies, according to federal estimates.

“The measures we are putting in place are above all a question of fairness,” explained M.^me Freeland, at a press conference. I am convinced that these measures will not have negative effects on business investment in the country or their mood. »

The Trudeau government estimates that it will collect 6.9 billion of the additional 19.4 billion expected in the first year. Many taxpayers risk taking action before the changes come into force, estimates Stéphane Leblanc, tax partner at EY.

“About $55 billion more in capital gains are expected to be realized over the next two months due to the upcoming deadline. »

Currently, a “high-income” Quebec taxpayer who declares a profit of $300,000 by selling a second home is taxed on half of the amount, or $150,000. His tax bill would be around $80,000. It would increase by about $4,440 under the Freeland budget changes.

Real estate investors are at a disadvantage compared to those who hold stock market investments, for example, underlines Mr. Leblanc. These owners have “less flexibility” to dispose of an asset that is not “liquid,” says the expert. In addition, it is easier to carry out tax planning when you hold liquid investments (stocks, bonds, options on securities), adds Mr. Leblanc.

The Trudeau government targets both individuals and businesses. Ottawa is particularly looking at taxpayers who have been able to build investment portfolios over time. In this category we find professionals such as doctors as well as lawyers, who have incorporated themselves and who generate income through passive investments.

If it harmonizes with Ottawa’s changes, Quebec will also pocket new revenues. However, it is difficult to get an idea of ​​the magnitude of these potential revenues based on federal data.

Different welcomes

In a country that already “taxes” “generously”, this tightening decreed by Ottawa has the appearance of a “bazooka measure”, estimates Robert Asselin, first vice-president of the Business Council of Canada and former budget director of the federal Minister of Finance Bill Morneau.

“We tell investors and people who have money ‘your capital is less welcome than it was yesterday, we are going to tax it more,’” says Mr. Asselin. It’s a choice that can be defended by the government, except that we are competing with other countries. »

In the business community, this decision risks making private investment “less attractive” in the economy.

Unsurprisingly, the Institute for Socioeconomic Research and Information does not see things the same way. Researcher at the left-wing think tank, Colin Pratte, recalls that before being lowered twice in 2000, the tax rate on capital gains was 75%.

“We can describe the Trudeau government’s approach as timid fiscal progressivism,” he said. By returning to the level that prevailed in the 1990s, Ottawa would have generated new revenues four times greater than what is announced here. Canada’s tax environment remains complacent for wealthy taxpayers despite the new measures. »

Give back with the other hand

While the Trudeau government is tightening the screws on wealthier taxpayers as well as corporations, it is offering two relaxations to the smallest entrepreneurs which, when combined, will total 3.25 million in exemption on capital gains. However, we will have to wait a decade before the second measure is fully effective.

“Providing a partial exemption for entrepreneurs will allow them to reallocate more capital to their next goals, whether it is a new business, an investment in a start-up business or a comfortable retirement,” it is argued in the budget.

Initially, the exemption ceiling on the sale of small company shares, agricultural and fishing property will be raised by 25%, to 1.25 million, in three months. This threshold will continue to be indexed to inflation annually.

The other incentive takes the form of a reduction in the inclusion rate to 33.3% “on a maximum sum” of 2 million in terms of capital gains. This “maximum” will be reached in 2034. In the meantime, the amount will increase by $200,000 per year.