Federal Government Proposes Changes to Capital Gains Tax

In a bold move to address tax fairness and boost housing construction, the federal government tabled a motion on Monday to revise how capital gains are taxed in Canada.

Finance Minister Chrystia Freeland introduced the motion in Parliament, aiming to raise the capital gains inclusion rate from 50% to 67% on annual gains above $250,000 for individuals, and on all gains for corporations and most trusts. This change is projected to generate $19.4 billion over the next five years.

“Today it is possible for a carpenter or a nurse to pay tax at a higher marginal rate than a multi-millionaire. That isn’t fair,” Freeland said. “This change will help fund our efforts to turbocharge the building of four million more homes and support investments in growth and productivity.”

Currently, capital gains are taxed at an inclusion rate of 50%, meaning half of the profits from the sale of assets are added to taxable income. Under the new proposal, gains exceeding $250,000 annually for individuals will be taxed at a 67% inclusion rate, with all corporate gains subject to this higher rate. Principal residences will remain exempt.

The Liberals argue that this measure will impact only a small minority of Canadians, approximately 40,000 people annually. Canadians for Tax Fairness praised the change as a necessary step towards equity, while the Canadian Federation of Independent Business (CFIB) expressed concern that more than half of small business owners fear negative impacts on their business sales and private investments.

However, the proposal includes an increase in the lifetime capital gains exemption to $1.25 million, up from just over $1 million. Entrepreneurs can also claim a reduced inclusion rate of 33% on gains up to $2 million over their lifetime.

Critics, including the Canadian Medical Association, warn of broader consequences, arguing that the tax change could place undue financial strain on professionals and undermine sectors like healthcare. The Council of Canadian Innovators also voiced concerns, suggesting the changes might deter investment in Canadian businesses.

Despite the backlash, Freeland defended the measure as a fiscally responsible way to fund crucial budget investments. She noted that the Bank of Canada’s recent rate cut reflects economic challenges that the government aims to address through these reforms.

The Conservative Party has yet to announce its stance on the proposal, but leader Pierre Poilievre has strongly opposed both the capital gains tax change and the proposed 2024 budget. The motion’s outcome remains uncertain as Parliament deliberates on the future of capital gains taxation in Canada.