Many furious over capital gains changes
Doctors, tech industry players and business groups among those criticizing the moves
Finance Minister Chrystia Freeland predicted people would be angry.
She was right.
With more than $60 billion in new spending detailed in this week’s federal budget, the Liberal government was searching for a way to rake in more revenue to help pay for it all. In the end, Freeland decided the best target was capital gains — profits earned by individuals and corporations when they cash in on stocks, real estate or the sale of a business — wrapped in a claim that this would impact only the richest of the rich.
But she knew there would be blowback. “There will be many voices raised in protest. No one likes paying more tax, even, or perhaps, particularly, those who can afford it the most,” she said Tuesday when tabling the budget in the House of Commons.
A few days later, there are objections aplenty. Doctors, tech industry players, business groups and more have criticized the changes. Some proclaim they won’t just affect the ultra-rich. Others say they will discourage new businesses from starting in this country, and contribute to what the Bank of Canada has already declared an “emergency” of low productivity.
Let’s cut through the noise and clarify what’s going on.
What are capital gains, and how are they taxed?
Everyone with a job knows how income tax works. The government taxes every dollar you make at a certain percentage.
But wages aren’t the only way to make money. One can also profit from owning things that get more valuable with time. Buy a stock, a cabin or start a business, and eventually sell it. The difference between what it was worth at first and what it’s worth when you sell it: that’s capital gain.
This type of earning is taxed differently than regular income. When somebody cashes in on capital gains, only half of the profit counts as income. For example, if you sell a stock for a $100,000 profit, $50,000 would get added to your income that year, and taxed accordingly. This 50-per-cent treatment is called the “capital gains inclusion rate.” It’s the amount of capital gains that is subject to income tax.
According to Alexandra Spinner, partner at the Toronto accounting firm Crowe Soberman LLP, there are three ways to trigger these taxes on capital gains. The first is from the example above: somebody sells an asset that has grown in value. But capital gains tax also kicks in when the owner of an asset emigrates from Canada, or when they die, Spinner explained.
OK. What is changing?
Tuesday’s budget promised to change how the government taxes capital gains in two main ways, both of which kick in June 25.
For individuals, the “inclusion rate” will remain at 50 per cent for up to $250,000 per year in capital gains earnings. But for capital gains earnings above $250,000, the inclusion rate will increase from 50 to 66.7 per cent. That means two-thirds of the profits that exceed $250,000 will be taxed as income, instead of just half.
There will still be zero capital gains taxes on principal residences, although the increase would affect anyone selling or inheriting a second property, like a family cottage, Spinner said.
The second main change is for businesses and the investments that many people and professionals house inside corporations. Every dollar of profit from these assets will get the new, higher inclusion rate of 66.7 per cent.
To soften the blow of this second change on small businesses, the Liberal government increased the existing “lifetime capital gains exemption” from $1 million to $1.25 million. As Spinner explained, the exemption means that when people sell an active business, farm or fishing property, the first $1.25 million in profit will not get hit with any capital gains tax.
On top of this, the budget promised a new measure called the “Canadian Entrepreneurs’ Incentive.” This would drop the rate of capital gains inclusion for the sale of an eligible business to one-third for the first $2 million in profits earned. According to finance officials, this measure is aimed at new businesses like tech startups, to ensure the higher capital gains rate doesn’t deter them from starting up in Canada.
Who will be affected?
The government claims the change to the individual capital gains inclusion rate will affect a tiny sliver of the population: 0.13 per cent. That’s based on projections — which is modelled on economic performance, population growth and tax filings, according to finance officials — that predict 40,000 people will earn more than $250,000 in capital gains in 2025.
The Liberals also claim that a “small minority” of businesses will pay higher taxes because of these changes. To back that up, the budget included a graphic that showed 12.6 per cent — or 307,000 — of the almost 2.4 million corporations in Canada posted capital gains profits in 2022.
This is where the criticism comes in.
Won’t this just affect the super rich?
David-Alexandre Brassard is chief economist at the Chartered Professional Accountants of Canada. He doubts the government’s claim that only the richest individuals will end up paying higher taxes. Part of the reason, he said, is that many people could end up paying higher tax on capital gains through one or two “lifetime” events, such as the once-in-ageneration sale or inheritance of a family cottage, or the sale of an active business that has grown significantly in value over the course of someone’s working life.
These people would still make money, just not as much as they would have without the changes — and they might not consider themselves superrich, Brassard said.
“The narrative that you’re hitting only the ultra-wealthy people … that’s misleading,” Brassard said.
Some in the tech industry have also objected, such as Ramy Nassar, the chief executive officer of 1000 Days Out, a consulting firm for tech startups in Kitchener-Waterloo. As a signatory of an open letter denouncing the capital gains changes, Nassar said he is most bothered by “this assumption that just because you have a capital gain means you’re wealthy or rich.”
As Nassar explained, many people in the tech startup world agree to lower salaries in exchange for shares in businesses that aspire to future growth, either through their own expansion or through being bought out by another company.
A decrease in expected income from those shares could push talented workers and new businesses to establish themselves where taxes are lower, he argued.
“It’s the foundational argument of capitalism that you have to let people make money.
Otherwise, they will go somewhere else to make money there,” he said.
Who is objecting?
Brassard, with the CPA, said the tax increase makes Canada appear “a little less competitive”
as a place to start a new business. He also said recent concerns about productivity — the economic output of Canada’s labour force — could be exacerbated by the changes, since if businesses face higher taxes, they will have less money to invest to boost productivity.
Others who have raised concerns include professionals who are allowed to start corporations for their practices, like family doctors, lawyers, dentists and architects.
As Spinner, the Toronto accountant, explained, many of these firms also create business accounts where they use profits to buy stocks or other investments. Sometimes this is to fund practitioners’ retirements, or parental leaves, or to simply make more money for future growth of the business. Spinner called this a “super RSP” that will now be taxed at a higher rate, fuelling the frustrations of some professional associations.
For example, the Ontario Medical Association warned this week that the changes could create such a disincentive that they “could force existing physicians out of practice and dissuade new grads from practicing in Canada.”