Capital gains tax in Canada: What has changed? Achi-News

A controversial increase to the capital gains inclusion rate is now in place despite strong pushback from small businesses, farmers and medical professionals.

Starting Tuesday, individuals with capital gains of more than $250,000 will be subject to a 67 percent inclusion rate, up from 50 percent previously. For corporations, all capital gains are now subject to the two-thirds inclusion rate.

The federal government says the move will improve tax fairness and increase federal revenue by $19.4 billion over five years, with a bulk of that money flowing into federal coffers this year. Budget 2024 shows that the inclusion rate change will bring in an estimated $6.9 billion dollars this fiscal year.

The tax change applies to profits made from the sale of property or secondary investments, including stocks or bonds and family cottages. The new inclusion rate does not change the tax rate itself, which will remain the marginal rate of an individual or corporation, but it increases the taxable portion of that gain.

“Do you want to live in a country where we make the investments we need – in healthcare, in housing, in old age pensions – but we lack the political will to pay for them, and we we choose instead to transfer a huge debt to our country. children?” Finance Minister and Deputy Prime Minister Chrystia Freeland asked in Toronto earlier this month.

EY Canada’s tax policy leader, Fred O’Riordan, says the government appears to be using this tax change to keep the federal deficit under $40 billion.

“Instead of making Budget Day effective immediately, which is why most of them have been done, they gave that time window a few months until June 25,” O’Riordan said. “Many of us believe that the main reason they did that was to encourage people to crystallize, to realize capital gains sooner than they otherwise could and then bring additional tax revenue into this financial year.”

Law firms and other corporations that regularly deal with capital gains say that since the measures were announced in Budget 2024, clients have rushed to realize their gains before the changes come into effect on June 25.

“I’ve heard from some Canadians who are concerned,” Freeland said in Toronto earlier this month. “Nobody likes paying more tax, even those who can afford it the most.”

But while the Liberals argue that this increase will only affect the 0.13 per cent of Canadians with capital gains income, a variety of groups from small businesses to medical professionals and farmers have called for immediate changes.

“Politically speaking, you’d think there would be some room for manoeuvre, but they haven’t budgeted at all and you have to think that’s because they really want the revenue,” said O’Riordan.

Details of the change were included in the so-called “Notification of Ways and Means Proposal” which was approved by the House before it rose in June. The legislative details of the tax change are expected to be released later this summer, and the bill itself will be voted on when Parliament returns in the fall.

Although the change is now in force, O’Riordan believes the government still has time to make carves.

“They had really painted themselves into a corner but who knows,” he said. “There’s still wiggle room there if they want to change their mind.”

Farmers say increase their ‘targets’

Last week, a survey released by the Canadian Federation of Independent Business (CFIB) found that the change will affect half of all small business owners in Canada and another 45 per cent said the tax would affect the investments they have in private.

Ottawa has said that only 12.6 per cent of Canadian corporations reported capital gains in 2022.

One of the strongest small business groups pushing the federal government to reverse course are farmers who say family-owned farms across Canada will be negatively affected.

Günter Jochum’s family owns and operates a wheat farm just outside of Winnipeg and calls the change “outrageous,” He says the increase will make it more difficult to pass the family farm on to his daughter , Fiona, when she’s ready to take over.

Although farmers must pay capital gains on the proceeds from the sale of their farmland, a portion of the property that the Canada Revenue Agency considers a principal residence is exempt.

“My parents still pull from the farm. I myself pull from the farm,” he said. “These changes will mean that there is now more of a tax burden and it will make it more difficult for my daughter to maintain the farm and be able to satisfy the three households.”

Jochum, who is also president of the Wheat Growers Association, said the tax change makes farming less attractive and could lead to more farms being sold outright rather than being passed on to the next generation.

“I get what they’re trying to do; they’re trying to hit the very big corporations that make billions of dollars,” Jochum said. “That’s not farmers who are small businesses, and we’re somehow being bumped into that and that’s very dangerous.”

The government recently increased the Lifetime Capital Gains Exemption (LCGE) which allows tax-free capital gains of up to a new $1.25 million on the sale of qualifying properties. Prior to June 25, the LCGE limit for small business, farm and fishing property shares was $1.016 million.

While that cumulative lifetime exemption is helpful, Jochum argues it’s not enough. Jochum says his accountant advised him that despite programs like the LCGE supposed to help farmers, he should expect to pay around 30 per cent more on the eventual sale of his farm.

“You want to stick everything in your business to build it and take it to where it is today,” said Jochum, adding that he chose to invest in his farm rather than in an RRSP. “It’s very insulting for the government to come along and take advantage of my retirement, and say, ‘Yes, we want to tax your retirement 30 per cent more,’.”

Doctors ‘disappointed’ with tax increase

Medical professionals have also joined the chorus of voices calling for change. Most GPs are considered corporations for tax purposes and will now be subject to the higher inclusion rate.

The president of the Canadian Medical Association, Dr. Joss Reimer, says it is “disappointing” that the government did not make any exceptions for family doctors. Unlike individuals, the higher inclusion rate affects all capital gains earned by corporations. Reimer fears that disparity will affect the bottom line of many family practices and could make doctors less likely to enter or stay in family practice.

“We know there are so many Canadians who don’t already have access to a health care provider,” he said. “Anything that is going to cause any of our doctors to consider not doing family medicine or reducing their hours is very concerning.”

Reimer says she is hopeful the government will hold talks with members of the medical community over the summer. One solution, he said, is to allow family doctors to use their personal $250,000 annual exemption for their corporation.

“Then we would still be taxed just like everyone else, but it treats us more like the individuals we are,” he said. “We’re not the same as the big companies that have their shareholders… We’re trying to save for our retirements, from maternity leave or sick leave, all those things that doctors aren’t usually eligible for get.”

New measures for entrepreneurs

The government’s ways and means proposal also includes a new Canadian Entrepreneur Incentive promised in the spring budget.

This measure will reduce the inclusion rate to 33 percent on a lifetime maximum of $2 million on qualifying capital gains. The limit will start with $200,000 in 2025 and increase by that amount each year until it reaches the $2 million threshold in 2034.

Entrepreneurs can also use the lifetime capital gains exemption of $1.25 million, resulting in a combined exemption of at least $3.25 million.

What doesn’t change

The measures coming into force today will not affect capital gains on tax sheltered savings which are currently exempt.

This includes:

1. Capital gains from the sale of a principal residence
2. Income earned in tax-sheltered savings accounts, such as tax-free savings accounts (TFSA), First Home Savings Account (FHSA), registered retirement savings plan (RRSP) or registered education savings plan (RESP)
3. Pension income or capital gains earned by registered pension schemes

The first $250,000 earned in capital gains will continue to be subject to the 50 percent inclusion rate for individuals.

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