The new budget will increase capital gains inclusion rates for high earners, expecting to generate $21.9bn
The federal government has announced plans to modify the inclusion rate on capital gains taxes. This change will affect corporations and individuals earning above a specific income threshold.
According to BNN Bloomberg, the adjustments aim to address tax advantages currently unavailable to middle-class Canadians.
Finance Minister Chrystia Freeland introduced the 2024 budget on Tuesday, which outlines the new tax measures.
The budget projects these changes will generate $21.9bn over five years, aiding in funding initiatives like enhancing Canada's housing supply. It also includes tax benefits designed to support entrepreneurs.
Specifically, the 2024 budget states, “The government intends to increase the inclusion rate on capital gains realized annually above $250,000 by individuals and on all capital gains by corporations and trusts from one-half to two-thirds.”
This adjustment to the Income Tax Act is slated to take effect on June 25. However, gains up to $250,000 annually by individuals will remain at the current one-half rate.
Approximately 12 per cent of Canadian companies and 0.13 per cent of Canadians, with average incomes of $1.42m, will see an increase in personal income tax on capital gains due to these changes.
John Oakey, VP of taxation at CPA Canada, mentioned that this announcement might prompt some to realize gains under the existing rules before the new rates apply.
The Department of Finance assures that middle-class Canadians will continue to benefit from various exemptions, including the $250,000 annual threshold, tax-free savings accounts, the principal residence exemption, and registered pension plans.
The Department of Finance provided an example illustrating the impact of the new rules: a high-income earner in Ontario with a $400,000 salary and $300,000 from the sale of a second property would see their tax increase by $4,461 to $158,333 under the new rules, compared to $150,000 currently.
The budget emphasizes the importance of tax fairness across generations and highlights the discrepancy in taxes on income from wages versus capital gains and dividends. It also notes that, among G7 countries, Canada offers more significant capital gains tax benefits.
The Department of Finance asserts that the proposed tax increase will not adversely affect Canada's business competitiveness, pointing out that, unlike Canada's planned two-thirds inclusion rate, corporations in most other countries, including the US, are taxed on 100 percent of their capital gains.
Regarding potential impacts on the middle class, Oakey suggested that the $250,000 threshold is generally adequate to prevent regular effects on non-wealthy individuals, though one-time events might push some above this limit, resulting in higher taxes.
With $46bn in new spending measures announced, concerns have been raised about tax increases to manage these costs effectively. The new spending aims to boost housing supply, support AI development, and enhance defence spending.
Prior to the budget, a one-time 15 percent windfall tax on banks earning over $1bn was implemented in 2022, illustrating an increase in the tax burden on large firms.
Additionally, the budget proposes the Canadian Entrepreneurs’ Incentive to encourage entrepreneurship by reducing the inclusion rate to 33.3 per cent on up to $2m in eligible capital gains, offering a combined exemption of at least $3.25m when selling all or part of a business by 2034.
This incentive targets founding investors in certain sectors who have maintained significant ownership and employment ties to their businesses.
