The Financial Planning Association of Canada | E130

The Financial Planning Association of Canada | E130

In this episode, Jason delves into the tumultuous developments in capital gains taxation in Canada over the past year. From initial changes announced by the Trudeau government to the ensuing financial planning frenzy, and culminating in the resignation of the Prime Minister and a subsequent lawsuit, this video clarifies what capital gains are and how they are taxed. We examine the impact of proposed changes on investors, including those involving corporate and personal tax rates, and discuss the ultimate resolution with the election of Mark Carney as Liberal leader. Finally, we consider new proposals from opposition leaders that could affect future taxation. Stay informed on this rollercoaster of tax policy changes and their implications for Canadian investors.

Full Transcript

FPCBO 130 - Wait, What's My Capital Gains Tax Rate?

===

Jason Pereira: [00:00:00] Have you been confused about capital gains taxation lately? Well, if so, you're not alone. In the last year, there have been more twists, turns, and uncertainty about how capital gains are taxed in Canada than probably any other time in history. I'm gonna clear this all up by telling you all about capital gains, how they're taxed and assorted tale of premature announcements, last minute tax planning, resignation of a Prime Minister, a lawsuit, and how we ended up pretty much back where we started.

Well, sort of, but thanks to election. Let's start by answering the question of what capital gains is. Capital gain is simply the profit you make when an investment increases in value. For example, if you buy something for $10,000 and its value rises to 11,000, you have a $1,000 capital gain while you own that property.

There's no tax implications, but when you sell it, you're deemed to have realized or received the gain from the sale, which is subject to tax. The good news for investors is that capital gains are treated differently in Canada than ordinary income. Income is usually subject to standard federal and provincial tax rates, which started zero and eventually climbed to as high as 44% to 54.8% depending on where you live for the highest income earners in the country.

On the other hand, capital gains are subject to the capital gains inclusion rate to reduce the tax rate on capital gains. Canadian tax law effectively says, Hey, investor, take X percent of the capital gain tax rate as of January 1st, 2024. The inclusion rate was set at 50%. That means in our example, with a thousand dollars gain, $500 will be tax free and $500 will be taxable at standard rates.

Look at it another way. The inclusion rate being 50% means that tax rates on capital gains are effectively half starting from zero and moving all the way up to a maximum of 22 to 27.4%. Again, depending on what promise you live in. But then in April, 2024, the drama began. The 2024 budget, the Trudeau government announced it would increase the capital gains inclusion rate from 50% to two thirds on any amount over $250,000 as of June 25th, 2024.

Now, an important note here is that it just made the announcement and provided some guidance on the budget. They never actually tabled the bill to make this happen. We're gonna come back to that later. So doesn't mean that for anyone earning under 250,000 capital gains in a given year, nothing would change.

But for every dollar above that threshold. You would get to keep only one third of that tax free and pay full tax on two thirds of the gain that pushed the tax rate up to 29.3% to 36.53. To understand the impact of this, you have to know how corporate and personal tax rates worked in Canada. These taxes are traditionally adhered to a policy notice.

Integration taking get complicated, but the corporation will pay tax on gains when it comes to buying and selling investments within a corporation. When you take the gains outta the corp, you'll pay personal income tax on that money. The corporation will get a partial refund. The end goal is if you earned a capital gain dividends or interest in a corporation, by the time that money lands in your hands, the combined personal and corporate tax bills will equal the same thing as if you paid it personally.

Overall, it's a very fair principle. However, the lack of a $250,000 threshold for corporations broke integration on capital gains because they would be subject to inclusion at the two thirds rate from the first dollar. That means that by the time the investor pulled out the capital gain from the corporation, the combined personal and corporate tax bills were gonna be something like 32 to 39%.

Making an investor who had invested money within the corporation or soften if they held it personally when the change was announced, the government state would only impact 0.13% of the population and the top 0.1% of income earners, unfortunately, for the government, this was quickly debunked with Stats Canada data showing that while they were telling the truth about it being 0.13%.

It wasn't the same 0.13% every year. In fact, according to Stats Canada, of the 34,000 people who exceeded $250,000 in capital gain in 2016, only 700 of those people exceeded 250,000 again in the next 10 years. That means it was mostly a different point, one 3% being affected every year. The reason for this is simple.

Capital gains are not like regular income tax is not paid on the manually it's paid when the gain is realized, which requires a sale. Some of the big potential losers to this change were people who own cottages and second properties. These properties are generally held for longer periods of time, and given the run up in housing prices in the last 15 to 20 years, many boomers were, you know, were forward awakening when it came time to sell with increased capital gains taxes.

So [00:05:00] what happened next? Well, the no one surprise financial planners and accounts went to work trying to assess the damage and doing what they could to get ahead of it. Many people chose to realize their tax bills prior to the deadline. Or even pass on ownership of property like cottages and investment properties to their eventual heirs in order to get ahead of this change.

Now, remember how I said the government only announced a change and never tabled the bill? Well, believe it or not, the June 25th deadline came and went, and we still hadn't seen a proposed bill. Fast forward for the next few months and some preliminary legislation starts bouncing around and everyone looked at it and it looked like it would be moving forward.

Even though the legislation hadn't passed, we entered 2025 with a higher inclusion rate. It looked like it was gonna be a certainty, but then on January 6th, you were hit with a curve ball. Justin Trudeau resigned as Prime Minister and Prorogue Parliament until a new liberal leader can be selected. This made things well complicated.

Not only had legislation not been introduced or passed to increase the inclusion rate, but odds were that we would [00:06:00] have an election once a new leader was elected. This made the odds of getting a change passed into law before the tax filing deadline slim to near zero. And then there was the fact that the leader of the opposition and all the leading candidates to replace Justin Trudeau all openly stated that they would not proceed with increasing with the inclusion rate, and Canadian taxpayers were left with their head spinning and what was effectively some weird tax version of Schrodinger's cat, despite the lack of legislation, CRA let it be, know that they had been instructed to start collecting capital gains at the newer inclusion rates and plan to go ahead on doing so.

Well, that's when the lawsuit started. The Canadian Federation of Taxpayers sued CRA stating that the government has no legal right to enforce this tax hike because it has not received legislative approval by parliament. And this tax grab violates the fundamental principle of no taxation without representation.

That's why we were asking the courts to put an immediate stop to this bureaucratic overreach. Well, it didn't take long for a response because shortly thereafter, finance Mr. Dominic LeBlanc announced that the increase of the inclusion rate was gonna be deferred until January 1st, [00:07:00] 2026. Or was it the final act of the sorted tale happened when Mark Carney won the liberal leadership race in March and became Prime Minister, and within a few minutes of doing so, he killed the change once and for all in his acceptance speech.

This means that everyone who had realized capital gains earlier to avoid the increased rate effectively did it for well nothing, and is now technically worse off for having paid capital gains tax probably years earlier than when I need to. Just when you thought the story was over, we learned it's never really Over.

In an election year on March 30th, conservative leader Pierre Paul ever announced his proposed Canada first tax cut policy that would eliminate capital gains for individuals and businesses that reinvested the proceeds of the asset sales into the Canadian economy. What does that mean? Well, we aren't fully sure yet because it's short on details, but there's a few floating out there.

All we do know is that depending on who wins this election, this rollercoaster may not be over yet. That's the story. After [00:08:00] 12 months, we've returned back to where we started regarding capital gains taxation. For now, unfortunately, for many, they now have a tax bill that they should never have triggered.

Professionals have spent untold hours and resources planning for something that never happened. CS spent taxpayer money to change systems and forms and reflect the change all for no good reason. Hopefully, future governments will take a lesson from this and have their work done before making announcements.

Time will tell and we'll see.