Capital gains tax increase: What is the change? Will you have to pay?
Despite criticism, Ottawa determined to proceed for `intergenerational fairness'
Framed as a way to help young people buy their first home by making older, richer Canadians pay more taxes, the federal government plans to change the capital gains tax June 25, raising the inclusion rate from 50 to 67 per cent on gains over $250,000 for individuals.
The government said the changes will impact the wealthiest 0.13 per cent of Canadians, or 40,000 people each year, and about 12 per cent of the country's corporations. It's expected to net $19.3 billion for the government over the next five years.
But what does that mean in B.C., where real estate has historically been viewed as a good investment, including for those who don't consider themselves among the country's richest?
Here's what you need to know about the tax increase:
WHAT IS THE CAPITAL GAINS TAX?
The tax is assessed when someone sells an investment. That can include real estate like land and buildings, or securities like stocks and bonds.
Put simply, capital gains are the difference between the investment's purchase price and the sale price.
In B.C., where real estate values have skyrocketed over a short time, many owners will realize significant capital gains when selling a property that's not their primary home.
An inherited property, like a family cottage, can also be taxed if it wasn't the owner's primary residence when they died, or, in the case of a primary residence that was inherited by a child, when the child sells it.
WHAT IS CHANGING?
The federal government is proposing to change the capital gains inclusion rate — the portion of gains that are taxed — from 50 to 66.7 per cent on gains over $250,000 in a year for individuals. Amounts under $250,000 will be taxed at the previous 50 per cent rate.
The tax doesn't apply to principal residences.
WHY IS THE GOVERNMENT INCREASING THE TAX?
In the recent federal budget, the Liberal government said the current capital gains tax rate creates an unfair tax disparity, because the wealthier you are, the more your income is made up of gains that aren't completely taxed.
So they proposed to reduce the tax-exempt amount from half to about one-third of capital gains.
At a recent news conference in Saskatchewan, Prime Minister Justin Trudeau defended the change with an argument based on “intergenerational fairness.”
“I understand there are those who have been very, very successful off the way the system used to be who don't want to see the system changed,” he said. “Young people right now make up the largest part of our workforce and if they don't see paths to success, it's the entire economy that suffers.”
Asked about critics who claim the change will hurt Canadians who bought real estate as a retirement investment, Trudeau said he understands the concern for people with vacation homes, but “young people can't buy their primary residences yet.”
The tax changes come as the federal government plans to spend billions of dollars to boost Canada's housing supply and social programs.
WHO WILL THE CHANGE IMPACT?
While government documents claim the changes will impact only the wealthiest 0.13 per cent of Canadians, Fraser Valley lawyer Aman Bindra said middle-class British Columbians have historically seen real estate as a smart investment.
“Some people prefer it to the stock market,” he said.
KSW Lawyers has had a rush of calls since the tax changes were announced from clients asking what it will mean for them.
It's possible some may “look to off-load” investment property before June 25.
But Bindra said the opposite could also happen. The increased tax rate could put a “chill” on the real estate market if people decide to hold onto properties in order to avoid the tax.
“We might not know for a few years the impact of these policy changes,” he said, including the new B.C. flipping tax in his assessment.
Rob Greene, managing broker at LandQuest, a B.C. real estate company that specializes in ranches, waterfront and investment properties across the province, said he hasn't seen people rushing to put secondary properties on the market, although “presumably that's what you think might happen.”
He said the changes, which are still two months out, may not have “sunk in” for some people, but as the date approaches that could change.
Two other B.C. real estate companies specializing in vacation homes contacted by Postmedia News said they hadn't noticed a jump in listings either.
WHO'S OPPOSED?
The government has received pushback from business owners and groups that fear the tax increase could curb business investment in Canada.
The Canadian Medical Association is worried it will put more pressure on doctors, who don't have a pension and may have retirement investments instead.
Many in the technology sector have signed an open letter written by the Council of Canadian Investors calling for the government to scrap the tax increase.
But the federal government has continuously defended it as a way to make “the wealthiest Canadians pay their fair share.”