Capital Gains Tax Inclusion Rate to Increase

In less than a week from now, the federal Liberal government will table its second budget.
According to multiple sources, the focus will remain on investing in infrastructure by allowing massive deficits to occur. Nevertheless, rumor has it that the Liberals will review some of the current tax credits in order to add nearly $3 billion to the national treasury. A major tax change that could occur, is a major increase in capital gains taxes.

They could be increased by raising the inclusion rate from the now 50% to 66.67% or even 75%.
This would affect you as follows, if you have $200,000 worth of assets that you purchased for $100 000 and you decide to sell, you will pay taxes on only 50% of the gain you made i.e. you’d only pay taxes on $50 000. But if the inclusion rate was increased to, say, 75%, then you’d have to pay the capital gains tax on $75 000 instead of the initial $50 000. A change of the sort would lead to a significant tax increase for middle-class families that the Liberals promised to give tax relief.

Indeed, the capital gains taxes are only incurred when an individual decides to sell an asset above its nominal purchase price. That doesn’t make them “mandatory” like the income tax for instance. Only that fact could be, at some point, damaging for the economy. Such an increase would be an incentive for people to hold on to low performing assets. It could also make entrepreneurs and investors hang on to their investments instead of selling them and invest in a new emerging business with a brand new innovation, to precisely try to avoid paying this increase.

On a more historical aspect, it’s important to mention that the capital gains inclusion rate were first reduced in the 2000 budget tabled by the then Finance Minister Paul Martin, during the Chretien’s period. At that time, the government understood the importance of Canada to be competitive and attractive to investors: the inclusion rate in question was reduced from 75% to 50%. In his speech, Paul Martin explicitly said: “A key factor contributing to the difficulty of raising capital by new start-ups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains.”

If Finance Minister Bill Morneau and Prime Minister Justin Trudeau truly want long-term economic growth for Canada, then they should be thinking more about reducing the capital gains inclusion rate and taxes instead of increasing them, especially in the new era of President Donald Trump who has vowed to cut drastically taxes.
A move that could hurt Canada’s current attractiveness for investors. Let’s not also forget that our country still maintains one of the highest capital gains tax rates of all OECD countries: an issue that some Conservative leadership contenders already decided to tackle if elected.