The threat of a higher capital gains tax rate is resurfacing as Ottawa looks for ways to pay down a soaring deficit amid billions in spending on pandemic-relief measures.
There has been speculation ahead of each federal budget in recent years that the government will be tempted to increase the so-called capital gains inclusion rate, the percentage of capital gains included in taxable income, currently pegged at 50%.
The unprecedented spending on COVID-19 programs has pushed the projected size of the deficit to almost $400-billion and will make a capital gains tax increase more likely and certainly tempting.
Research is showing that such hike will only affect about 10 per cent of Canadian taxpayers, making it less risky politically than other speculated moves such as an increase to the Goods and Services Tax.
The capital gains inclusion rate is by no means untouchable, and it is perpetually on the mind of finance officials as a way to increase tax revenue without having to increase personal marginal tax rates.
As far as Canadian taxation history shows, there was no capital gains tax until 1972, when it was introduced at the 50-per-cent rate. It was then increased to 66.67 per cent in 1988 and then to a high of 75 per cent in the 1990s. In 2000, it dropped twice, first to 66.67 per cent and then to 50 per cent, which is where it stands today.
Speculation about a tax increase alone shouldn’t be enough to spur long-term investors to sell assets. Investors thinking about selling taxable assets in the near term, such as non-registered stocks or a secondary residence, might consider acting before the budget, which is usually released in March or April each year.
The best approach is to look for opportunities to accelerate planning or trading that investors were already considering, but not just because of concerns about an increase in capital gains tax rates, if it’s actually part of their business, retirement or estate plans.
Examples include individuals who are in the process of selling the shares of their private business, or those who need to sell appreciated taxable assets for estate planning or to shore up cash for a major expense.
One tax-efficient strategy for business owners to realize capital gains is selling the securities to a new or existing Canadian holding company in exchange for shares with an equivalent fair market value. The transaction requires careful planning, and should only be initiated with the help of tax and legal advisors.
Advisors need to discuss the possibility of a capital gains tax increase with their clients, even if it’s only speculation at this point. Even if the decision is to do nothing, at least they’ve had the conversation and raised their clients’ awareness to this possibility.
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