Taxing capital gains: entrepreneurial kryptonite or tax fairness?
The federal government’s plan to collect more tax from capital gains has been derided by the business community at-large for its predicted drag on productivity and impact to the economy.
But for the average household in the country and in Windsor-Essex – it's unlikely to mean much.
“The average household will likely not see an impact because the capital gains in excess of $250,000 are now taxed at a higher rate so, if your gains were below that and you do sell your investments it’s still the old rate,” said Andy Kovacs, a financial planner with SunLife.
The tax measure was included in the Liberal budget which claims it is aimed at wealthy Canadians and “tax fairness.”
As of June 25, the inclusion rate will jump from 50 per cent to 66 per cent on capital gains over $250,000.
The government uses an Ontario nurse earning $70,000 a year as its example. In this case, the government says that worker would face a combined federal-provincial marginal tax rate of 29.7 per cent. That’s compared to an Ontarian with $1 million of income being faced with a marginal tax rate of 26.8 per cent on their capital gains realized from selling stocks, homes, or other assets.
Kovacs points to those with multiple properties or large investment portfolios as most impacted by the change.
“It’s not uncommon for a cottage that was purchased 20 years ago to have appreciated well north of $250,000 so, should they decide to sell that cottage it will just result in a higher tax bill making it more difficult to keep it in the family,” said Kovacs.
The Windsor-Essex Regional Chamber of Commerce points to the change to the inclusion rate as cause for concern even while expressing “cautious optimism” about the federal budget as a whole.
“Productivity remains a challenge for our economy as our global competitor’s continue to gain an advantage,” said Rakesh Naidu, president and CEO of the chamber in a news release. “We need to make sure that there is a long-term plan to make our country more productive and an attractive destination to invest capital.”
The Business Council of Canada has also panned the federal budget as one that will inhibit growth and points to the capital gains measure as “particularly troubling” in a statement following the budget’s release.
The change does come with exemptions for entrepreneurs including a lifetime maximum of $2 million through the Canadian Entrepreneurs' Incentive and an increase from $1 million to $1.25 million for the sale of a small business, fishing, or farming property thorugh the Lifetime Capital Gains Exemption.
COMING SELL OFF?
The increase in capital gains doesn’t come into effect until the summer, giving some an opportunity to sell those assets before facing a larger tax bill.
Kovacs says each individual will have a decision to make when it comes to selling off assets to protect that accrued value from tax, noting a new government may reverse the decision.
“That’s really a question to have with their financial advisers,” said Kovacs. “Do they sell now to avoid the increase or do they ride it out?”
Kovacs adds working through the full picture with a financial planner or adviser can be a worthwhile endeavour.
“Despite these changes that perhaps many see as negative, we still live in the best country in the world where people have choice,” said Kovacs. “We all have to pay taxes but we don’t have to leave a tip.”
He also suggests the increase in capital gains tax should prompt a review of life insurance arrangements meant to fund final taxes owing when any property or asset is eventually sold to ensure there’s enough to cover the final bill.
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