Background
Canada is one of the richest countries in the world. For generations, this has meant that Canada is a place where everyone can ensure a better future for themselves and their children. This is largely due to our commitment to progressive taxation. To build a fair economy, everyone must pay their fair share. To restore justice for every generation, the government is investing in housing; in building the clean and innovative economy of the future; in child care, medical care, dental care and pharmaceutical care; on Canada’s security and Canada’s future. The government is doing this so that young people can have the same opportunities as previous generations. Canada’s future success depends on your success. It is only right that these important investments be funded by those who have benefited most from all the opportunities Canada has to offer.
Improve tax equity
Canadians pay taxes on their earned income. But currently, they only pay taxes on 50 percent of their capital gains, which is the gain typically made when an asset, such as a stock, is sold. This is the capital gains tax advantage, and it is more pronounced in Canada than in any other G7 country.
While all Canadians can benefit from this capital gains tax advantage if they have a capital gain, the wealthy, who tend to earn relatively more income from capital gains, benefit disproportionately compared to the middle class.
The current rules may lead to situations where wealthy people face a lower marginal tax rate on their capital gains than a middle-class worker would face on their earnings. For example, an Ontario nurse earning $70,000 would face a combined federal-provincial marginal tax rate of 29.7 per cent. By comparison, a wealthy person in Ontario with an income of $1 million would face a marginal tax rate of 26.8 per cent on her capital gains. This is not OK.
Tax fairness is important for all generations and is particularly important for younger Canadians. In 2021, only about 5 per cent of Canadians under the age of 30 made any capital gains. Only 0.01 per cent of Canadians under the age of 30 are expected to have capital gains above the $250,000 annual threshold in 2025.
The 2024 budget proposes an increase in capital gains taxes on the richest 0.13 percent.
To make the Canadian system fairer, the inclusion rate (the portion of capital gains on which taxes are paid) for capital gains for people with more than $250,000 in capital gains in a year will increase from half to two thirds. Individuals will continue to pay taxes only on 50 percent of any capital gains up to $250,000 a year.
The inclusion rate will also increase to two-thirds for all capital gains earned by corporations and trusts.
The new rules will apply to capital gains earned on or after June 25, 2024.
Selling your primary residence will still be exempt from capital gains tax.
Example of a high-income individual
A high-income person living in Ontario with a salary of $400,000 also makes a profit of $300,000 on the sale of a second property. Under current rules, they pay income tax on 50 percent ($150,000) of that capital gain.
If they have the same gain in 2025, they will now pay taxes on $158,333 of the gain (50 percent x $250,000 = $125,000) plus (2/3 x $50,000 = $33,333) = $158,333).
Because their high income puts them in the highest marginal tax rate, the switch to capital gains taxes will cost them $4,461 more in combined federal and provincial income taxes.
For 99.87 per cent of Canadians, personal income taxes on capital gains will not increase.
Next year, 28.5 million Canadians are expected to earn no capital gains income, and 3 million are expected to earn capital gains below the $250,000 annual threshold. Only 0.13 per cent of Canadians with an average income of $1.42 million are expected to pay more personal income taxes on their capital gains in a given year.
About 12 per cent of Canada’s corporations would face the highest inclusion rate in their capital gains.
Middle-class Canadians will continue to benefit from the $250,000 annual threshold, tax-free savings accounts, the primary residence exemption and exemptions for registered pension plans.
Capital gains on primary residences will continue to be tax-free to ensure Canadians do not pay capital gains taxes when selling their home. Any amount you earn from selling your home will remain tax-free.
Capital gains within a registered retirement savings plan, tax-free savings account, tax-free first home savings account or other registered savings vehicle will remain tax-free. Capital gains within a registered pension plan and the Canada Pension Plan and the Quebec Pension Plan will continue to be tax-free. Capital gains for individuals of up to $250,000 from the sale of cabins, investment properties or stocks beyond the limits of tax-sheltered savings vehicles will continue to benefit from the current 50 percent inclusion rate.
Business owners and entrepreneurs will benefit from new relief.
The lifetime capital gains exemption for capital gains on the sale of a small business or fishing and agricultural property will increase by 25 percent, from approximately $1 million to $1.25 million, effective June 25, 2024, and will be indexed to inflation after 2025. Eligible capital gains of up to $2.25 million will be better off with these changes.
To encourage entrepreneurship, the government is proposing the Canadian Entrepreneur Incentive, which will reduce the inclusion rate to 33.3 per cent on a lifetime maximum of $2 million in eligible capital gains. Combined with the enhanced lifetime capital gains exemption, when this incentive is fully implemented, business owners will have a combined exemption of at least $3.25 million when selling all or part of a business and business owners with eligible capital gains up to $6.25 million will be better off. disabled under these changes.
This is not expected to harm Canada’s business competitiveness.
Increasing the capital gains inclusion rate is not expected to harm Canada’s business competitiveness.
First, companies in most other countries, including the United States, pay corporate income tax on 100 percent of their capital gains. With a two-thirds inclusion rate, corporate taxation in Canada remains competitive.
Second, the marginal effective tax rate (METR) is an estimate of the level of taxation on a new business investment, accounting for all levels of taxation, as well as investment tax credits and capital cost allowances. It is one of the main metrics to compare the level of taxes on startup investment between countries. Maintaining a competitive METR is important to Canada’s attractiveness as an investment destination.
Canada’s average METR is the best in the G7 and much more advantageous than that of the United States and other OECD countries. Increasing the fairness of capital gains taxes will not affect Canada’s METR score.
Canada has the lowest effective marginal tax rate in the G7
