Changes to Capital Gains Taxation

Most of you will have heard about the big tax news from Budget 2024 – the inclusion rate on capital gains is changing – increasing from 50% to 66.67% on capital gains over $250,000.  The government has assured Canadians that this will not affect many of us, and that it will apply to 0.13% of Canadians or about 40,000 individuals (Table 8.1) so there’s no need to be concerned.

The government wants to raise revenues to fund their programs and that’s what governments do, but this time they seem to have omitted some of the pertinent facts – “cherry-picking” as some would say – about who is going to be affected and how much.

When reading the budget and supporting documents and listening to the speeches, we are left with the impression that this cohort of 40,000 people is comprised of the ultra-rich (with the example used in the budget of someone making $1,000,000 in annual salary), that 40,000 is a consistent and predictable number, and that the people who comprise the cohort are the same people each and every year.

I take issue with all three of these assertions.

The best example I have to illustrate my concerns is a Date of Death return I prepared a number of years ago.  The taxpayer had, with their spouse, purchased two five-acre lots in rural area 65 years previous for $6,000 each.  On one lot they built their house (which she occupied until she passed) and on the other they started a small farm which has been dormant for years.  The taxpayer had been living on CPP and OAS and supplements for a number of years prior to her death – technically below the poverty line in BC so she was definitely not one of the top income earners in Canada.

When the taxpayer died the day of “Taxation Reckoning” came for the two lots.  The lot on which they built their home was treated as a principal residence and attracted no tax (it was larger than is typically allowed for PR, but not being sub-dividable we treated it all as tax-exempt).  The second (farm) lot was deemed to have been disposed of for fair market value – about $750,000.  This resulted in a capital gain of $744,000 and she was taxed on 50% of that gain – $372,000.   The estate filed and paid a six-figure tax bill.  Capital gains have always been tax preferentially, but they’re still taxed – and sometimes significantly.

Under the proposed legislation the taxpayer would have been taxed on $454,350 (($250,000 x 50%) + (494,000 x 66.67%)) and the tax bill would have increased by over $57,000 – close to 40%.

The taxpayer could not have been considered one of Canada’s “wealthiest individuals” but would have been affected by this tax that is supposed to only affect the rich.

The only action necessary to trigger this tax bill was for the taxpayer to die.

The irony of course is that the government is marketing this tax increase as an “intergenerational fairness” measure – but all they would have done in this situation decrease the inheritance that this taxpayer was able to leave to their children and grandchildren – and increase the amount that goes to Ottawa.

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