I have had many discussions over the last few years about a possible increase in the tax rate on capital gains. These discussions seem to have intensified of late. So, will it happen?
Just to be clear, it is not the actual tax rate that would be increased but it would be the percentage of the capital gain that is included in income – currently 50% and generally accepted that, if increased, would go to 75%. So, no matter what tax bracket you are in, the amount of tax paid on a capital gain will increase.
If the current government does propose to increase the inclusion rate from 50% to 75%, it will likely be “marketed” as a tax on the rich – “they should pay more to help out the middle class and help pay down the deficit” – that sort of thing. It seems that this may be true in that statistics have shown that it is only the “rich” that report big capital gains. However, this is skewed in that a “less than rich” taxpayer may report a large capital gain in one particular year (they have sold their business; made a particularly nice gain on one lucky stock pick, etc) that increases their income for that year, but otherwise reports more modest income both before and after that year. And it is my view that the revenue generated from such a move will not be significant in considering the size of our current budgetary deficit and also comes with a potential negative impact on capital/investment markets in Canada. But I digress.
The real (non-marketable) reason for an increase is driven more by our current tax system. There are two ways in which a return is received on your capital investment, where the investment is shares of a company (public or private) – a capital gain (by selling) or a dividend (income paid on the shares). The government would like to see the tax rate on both capital gains and dividend income be the same. Currently, depending on your tax bracket, a capital gain is taxed at a rate that is as much as 14% to 20% less than a dividend. As a result, tax advisors derive plans to ensure their clients realize capital gain income instead of dividends. This is something we at Welch do for our clients and this is why I have these kinds of discussions, as noted in my opening paragraph.
If it does happen, when will that be? Usually such a change in tax rules would be part of the annual federal budget with the next one likely to be in March/April 2022. But that remains the big question – will it be this coming year and, if yes, what will be the effective date? If there is something you can do to lock in the current 50% capital gain inclusion rate and the amounts make sense (there are costs to get there….), now might be the time to consider doing it. At Welch LLP, we can help.