Well, I go away for a few days and I get back to a chorus of disgruntled Canadian investors and business owners. The reason? The Liberals' 2024 budget had the audacity to touch the sacrosanct capital gains inclusion tax loophole.
Previously only 50% of capital gains (from selling property, stocks and shares, etc) were taxable in Canada, which always seemed like an unfair boon to the wealthiest 1%, who are doing just fine and really don't need protecting from anything. I should know: I'm one of them.
The new rule is that 67% of capital gains should be taxed - actually back to how things were in 1999 - although only for capital gains over $250,000 each year (that bar does not apply to corporations and trusts, only to individuals). Selling a primary residence remains exempted from capital gains tax, as before.
There are also some further carve-outs regarding lifetime capital gains limits for small businesses, farms, fishing property, and for entrepreneurs selling shares in some circumstances. So, a small business owner can still sell their business and not pay any tax on the first $1.25 million (increased from $1 million) in capital gains, and company founders in some industries now pay less tax on up to $2 million in capital gains over their lifetimes. It's complicated, but these carve-outs are designed to keep at least some of the business community (relatively) happy.
As the government points out, 28.5 million Canadians will not be declaring any capital gains at all next year, and a further 3 million will be protected by the $250,000 annual threshold. So, in the end, a paltry 40,000 ultra-wealthy individuals (about 0.13% of Canadians) are likely to be affected by the change, and maybe 12% of corporations.
So, not really that big a deal, right? Well, you wouldn't think that reading the financial pages of the Globe and Mail for example. Most people there, from tech entrepreneurs to regular rich investors, are outraged - outraged, I tell you! - that the government should interfere with their wealth-making in this way. There are headlines like "Higher capital gains won't work as claimed, but will harm the economy", and "Industries upset at being left out of new tax break for small business".
They say that the change will discourage entrepreneurs and chill venture capital investment, although the government has poo-poo'd these arguments, and it seems very unlikely to me that people are setting up businesses specifically to take advantage of the capital gains tax breaks.
At core, of course, it is the age-old debate. Conservatives don't like to be taxed, arguing that rich people and corporations will plough that money back into the economy. But that kind of trickle-down economics doesn't actually work in practice - they are just as likely to buy another luxury car or a fancy foreign holiday or just salt it away in a bank or some other unproductive investment vehicle. At best, it is a very inefficient snd uncertain way of growing the economy.
Liberals would say it is better to tax these people so that the money is available to directly invest in areas of the economy that need it most, whether that be healthcare, subsidized housing, low income supports, or measures to address climate change. And, anyway, the rich people already have enough to buy their cars, holidays and ETFs. I know on which side of the argument my values lie.
But there's also a certain amount of just plain disinformation flying around from people who should know better. Just as an example, an article in the Globe and Mail Business section no less, which states that "the change amounts to a 33-per-cent tax increase on investment activity" (no, it's a 33% increase in the inclusion rate for capital gains, i.e. of the amount that is taxable, not the actual tax paid - an article from accounting and consulting firm Grant Thornton says, "an individual subject to the top marginal tax rate can anticipate about an 8% - 9% increase in taxes on capital.gains in excess of $250,000".
Similarly, a tweet from a Conservative MP quotes Canada's capital gains tax rate as 67%, putting it much higher than most other countries, whereas 67% is actually the inclusion rate, not the effective tax rate. (The MP's biggest mistake was to ask ChatGPT for the information, rather than a more reputable source.)
Doctors and the medical profession in particular are complaining, with the Canadian Medical Association warning that it may push some doctors and surgeons (who often incorporate to take advantage of the tax breaks) out of the profession completely. This seems like real sky-is-falling hyperbole to me. How many doctors go into the profession because of the capital gains tax system? Doctors can still make a good living and be taxed (as a corporation) lower than many other lower-earning Canadians. If they also want to make additional money on the stock exchanges or property markets, that's on them, and they should be taxed appropriately on this unearned income. Right?
And bear in mind that about 40% of doctors choose not to incorporate (and can therefore take advantage of the $250,000 a year threshold). This change is likely to significantly affect only the top end of the population, doctors or not, primarily those with an annual income of over $1.4 million. Should we be unduly worried for these people?
There are those, and I would count myself among them, who believe that the CMA's press release is a disingenuous marketing campaign. Capital gains tax is not the reason that Canada has a shortage of doctors (there are many other reasons for that). Capital gains still get preferential tax treatment compared to the employer pension plans that the CMA bemoans that doctors are not able to have (because they chose to incorporate for the tax breaks!) It's pretzel logic in the extreme.
Another complaint about the CGT increase for companies is that it unfairly targets them and will reduce productivity. Many tax advisors are very suspicious of that argument, and there seems little real world evidence to support it. Also, how is it justifiable to make it more tax-efficient for a company to buy back its own shares (to increase its share price) rather than to distribute profits total shareholders as dividends?
Well, there are always going to be some complainers, whatever you do. In this case, it's the "ultra-rich" (a convenient shorthand for that 0.13%). So be it.
But are Canadian taxpayers really that badly done by anyway? It's hard to compare the Canadian capital gains tax with the American one, partly because the American system is so complicated, but if anything Canadian tax seems to be slightly less onerous at first glance. In the UK, capital gains are also taxed lower than regular income, and yes, it's just as contentious there (although the exempt amount was recently greatly reduced - and by a Conservative government!)
The government is quick to assure us that Canada's marginal tax rate is much lower than the OECD and the G7 average, and certainly lower than the USA's and UK's.
And anyway, having a low tax rate is only really good for rich people (although those rich people will tell you that they are the real engine of the country's economy). We ourselves are not badly off - some would say we are downright wealthy - but we are not in the habit of selling off chunks of savings to the tune of a quarter of a million dollars at a time. That is an awful lot of money. If you are throwing around those kinds of funds, even if it's just a family cottage, you can almost certainly afford it.
And anyway, what about the fact that the happiest countries in the world are those with the highest tax rates? Maybe it's not all about the money after all.
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