- April 27, 2024
- Posted by: legaleseblogger
- Category: Related News
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I work in wealth management for very high net worth clients. These changes in inclusion rate will heavily impact a very small percentage of the top 1%. But the main target is for businesses holding high value assets.
– For individuals, only a few will feel the difference. Those that have holding companies will feel it as well. Making more than 250k in capital gains in a single year doesnt happen very often even for rich clients.
– For corporations that’s a whole different story. Since the new inclusion rate will be in place directly, without any 250k at 50%.
The only moment I see « regular » people being hit by that is : sale of a cottage/secondary residence/investment property + sale of investments held for a LOOOOONG time in a non-registered account. All these events can also happen upon death.
Or you know, this could get switched back to 50% in 4 or 5 years !
For the record, the inclusion rate has changed, both up and down, over the years:
* Before May 23, 1985: 50%
* After May 22, 1985, and before 1988: 50%
* In 1988 and 1989: 66%
* From 1990 to 1999: 75%
* From 2001 to 2023: 50%
Via:
* https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/you-calculate-your-capital-gain-loss/inclusion-rates-previous-years.html
I’ll comment on it for incorporated professionals. This hits them fairly uniquely since there is no 250k exemption for corporations. So professionals that have invested in their corporation and planned to use it as a self funded pension/retirement vehicle are now getting specifically targeted by this tax. Physicians in Ontario accepted incorporating in lieu of fee increases, and those who have been retired for years now have to pay significantly more taxes.
Also from what I can tell if you lived in NYC in the US and had this situation (all amounts in USD though), you would pay $355K total in Capital Gains tax. More than either of the Canada scenarios, just as a comparison. I used [this calculator](https://smartasset.com/investing/capital-gains-tax-calculator#AUBINt6mWH).
Add the $250k exemption to corporations and you’ll see a lot less pushback. Similar to a few years ago when they tried to reduce the SMB deduction on passive income and ended up amending it so that only businesses with more than $150k in passive income lost the deduction. If this was really about targeting the 1% they would do this. But then again Morneau had some business sense, can’t say the same for Freeland.
https://www.cbc.ca/news/politics/small-business-federal-budget-2018-passive-income-1.4552976
Your asssumptions are maxing out all the numbers.
If you have 1m capital gains in stocks, you never need to realize 1m in gains per year. Thats a choice.
And not everyone selling a cottage is in the top tax bracket.
This will come to play for the deemed-disposal at death, so basically its mostly an inheritance-tax-equivalent.
Great post! For stocks, it’s implied in your post but not directly stated: it’s hilariously easy to avoid the higher inclusion rate as you can spread out your realized gains over a couple of years.
Here’s the truth:
people are angry because morons have told them to be angry…and if you heed the instruction of a moron, you’re a fool.
# I am a high net worth individual. I am frugal. I am in tech. I am in the highest tax bracket. I have a 3MM investment portfolio between my wife and I.
# This doesn’t affect me.
It doesn’t come close to affecting me.
Let that sink in a minute.
Most Canadians, 97%+, are not in my situation. Even if I got hit by a bus tomorrow, and my wife was suddenly sitting on 3MM and she would be in be in the 1% : It still wouldn’t affect her until she passed.
Seriously, I am super privileged and yes, one year we completely (and with full understanding the massive tax hit), flipped most of our non-registered portfolio: This still wouldn’t have affected us.
The people who this affects: they own the media. They own the social channels that can afford to lobby against this. They own lots of property they’ve been sitting on for years, that has appreciated disproportionally and to the detriment of all Canadians. Fuck those guys/gals, they can pay back into the system, they can afford it.
[ For anyone with an interest: I came from the middle class (when that was actually a thing). I lived in my parents basement until the last year of local university which my parents paid for, with a full fridge and a bus pass at my disposal. Yes, that is privilege, but it is not silver-spoon privilege. I trudged through 2% raises at a local company for over a decade before picking up stakes and going to US to work in top-tech. That was a game-changer, and being frugal, we capitalized on this. Came back to Montreal mid-Trump years and have worked on-and-off in tech since. Currently consulting in tech. ]
> That is a difference of paying an extra $66,925.88, if every single dollar was taxed at the highest marginal rate, on ONE MILLION DOLLARS OF REALIZED CAPITAL GAINS!
> Is this what we are angry about?
I mean, yes? Since when is 67k chump change? Even on $1M, it’s an extra 6.7% getting taxed.
Some people (not many, but some) have structured their entire financial or business plan around capital gains. How would you like it if 6.7% was suddenly taken out of your pension, or off your paycheck?
As an accountant who HATES Trudeau and Freeland. This who Cap gains thing is OVERBLOWN.
It affects people with $3-5M portfolios. People who have portfolios, in the year of their death and people with real estate other than principal residences.
Your scenario is correct. The incremental tax on this is $66K.
There are already benefits in place for people with Small Business and new benefits in place. I would say if you’re smart and in those situations the result of this budget is you’d be paying less tax in the majority of the situations.
> Say you sold it for $1.6 million. You are liable for $100K in capital gains taxes.
You made the same mistake everyone else does. The $100K is taxable at a 50% inclusion rate, or a 66.67% inclusion rate. You are NOT paying $100K in tax.
Yes and no.
I don’t think most people care about the rich paying more. Most people likely applaud it.
What people are concerned about is that this is a HUGE concern for innovation.
Lets say you create a company called shopify, worth $100 billion dollars, the founder has $8B dollars.
Do the math again, that’s a lot of money.
The “next shopify”, when they are a tiny little company, they will say “you should move to the US to save billions in tax”. The fear is that they will.
This will deprive Canada of
All the capital gains.
The jobs, and their income taxes.
The corporate taxes.
But hey, we’ll get another 1/2 Billion dollar in one time capital gains tax from that one rich guy.
It also means that if I was a VC fund, I would operate in the US, and I would tell every startup founder “Move to US if you want my investing dollars”.
Any startup with the means will leave the country.
This is called the brain drain.
Also all the investment in supporting strucutre will leave.
Amazon built a cloud servers in Toronto to support Canadian customers, what happens when all the Canadian tech companies move to the US, do you think they’ll keep growing and investing in Canada?
This tax is very bad.
Everyone agreed that the cut was a great idea when the Liberals did it decades ago.
The amount of tax paid before to the proposed changes is much higher. People don’t have faith in how the government spends money either. A better budget announcement would have been, we’re reducing 10% of the government and we need to raise capital gain taxes to pay down the debt. The whole thing stings new business creation because the government is continuing to tax more but giving us less.
This affects a lot more folks than people think. $67K is not chump change, even if your networth is in the millions. That’s money towards retirement, down payments, investments etc. that the government is taking from hard working Canadians that have contributed to society over the past couple decades. If you bought a rental property 10 years ago, this affects you. This is not taxing the rich elites.
That’s a short term perspective. The government is growing out of control and they need more money. They start with capital gains because indeed it doesn’t hit the median voter directly. You’ll feel it either in a shrinking economy, or in the next tax reform. Probably in both.
I think the reason it’s weird to tax capital gains too heavily is because to some extent it’s a tax on inflation. When an asset appreciates, some of that growth is due to inflation, and there is no real gain. Taxing inflation is weird.
This wouldn’t apply to salaries in the same way because the tax brackets are indexed to inflation.
On the final point about incorporated individuals: most professionals wind down their corporations rather than sell them. So the change makes no difference.
If a business has enduring value that can be sold, everyone has access to a lifetime capital gains exemption for selling that kind of business, which is currently I think $884k or $1m if it’s farm property. (The 884k is currently rising with inflation, and once it hits $1m both categories will rise together going forwards).
So the change only impacts people whose businesses have at least $1.25m in capital gains when they sell.
“We” are not angry, if by me you mean regular working class people who will not realize a ONE MILLION DOLLAR CAPITAL GAIN ever in our entire lives.
The only people even close to being middle/working class who this effects will realistically be people who own multiple properties beyond their primary dwelling… To which I say, GOOD!
Won’t most of these single person corporations qualify for small business deductions which from what I can gather is 9% federal and 3.2% provincial in Ontario (for example). So if they are paying themselves in dividends they would only be paying 11.2% tax on those gains if they keep their realized gains (and other income) under 500k? Or does capital gains income get taxed completely differently under a corporation?
I don’t think it’s so much the amount. Nor is it that my property taxes went up by 7.8% this year. Nor the carbon tax. Nor the highest marginal bracket going up to 53% a few years ago. Etc. There are other gov’t run agencies which have consistently been raising prices and I have no choice but to buy them (BC Hydro, BC Ferries, ICBC). Or them going after taxes on digital media/downloads.
For me, it’s three things. It’s the constant increases, and we can say that each individual part is small, and I think it’s clearly designed that way to ‘boil the frog’ so to speak. But secondly, it’s them going after money that wasn’t theirs to begin with. You’re somehow OK with them taking it because it’s not a large amount (or doesn’t affect you). But if I came and took your phone and said, “what do you care, it’s only $800 and you can buy a new one today”, that’s not the point. Whether it’s $50k or $50, it’s not mine to take. Lastly, I think most Canadians, youngish ones anyway, feel like they’re already in deep with a lot of high costs in life, there’s not a lot of money leftover. And for a government that is supposed to represent us and serve us, it instead feels very much like they take people as close to the edge as they can with what they can wring out of them. I don’t even have a doctor, very little effort on their end to get me one, they blow me off when I try to get one, but they’re happy to take my tax money.
I won’t go down the rabbit hole with what could in theory be theirs, and I’m not fighting against paying taxes. We can all understand taxes are necessary. But here we’re all pitted against one another arguing (the people it doesn’t affect arguing with those who it does), when it’s not me holding you back, and you’re not holding me back. Our questions and concerns need to be pointed to the gov’t, and these things need to be heard and answered by them. They work for us.
As a business owner, the capital gains affect us. You have a property you’ve had for a couple decades, the needs have changed and you’d like to essentially make a lateral move as far as property value, but different zoning/etc. It’s a massive hit with the capital gains to do that, when you’re not really profiting from the move. And no we’re tying up a 10 acre property that is far better suited to a condo building, like the others they’ve built around us in the past 10 years.
I know plenty of people with a family cabin/cottage (these are not properties that could be rented because they’re in the middle of nowhere), it brings their family a little joy to go there, and when the parents pass the kids will have to sell just to pay the capital gains. End of the family cabin. That’s not a result of this increase, that existed before, but it’s not helping.
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