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Understanding the Impacts of Canada’s Capital Gains Tax Increase

On June 25, 2024, Canada is set to implement a significant change to its capital gains tax policy, which will impact every Canadian across the board—from individuals to large corporations. This adjustment is being presented by the government as a way to increase the tax fairness by targeting higher-income earners who typically realize substantial capital gains[1].

Key Changes to the Tax Policy

Starting June 25, the inclusion rate for capital gains will rise from the current 50% to 66.67% for corporations, trusts, and individuals on gains that exceed $250,000 per year. For individuals, the first $250,000 of capital gains realized in a year will remain taxed at the current 50% inclusion rate. This modification, as part of the 2024 federal budget, is expected to generate revenues of approximately $20B CAD in revenue for the government[1][2].

Economic and Social Implications

Suggested Advantages:

• Increased Government Revenue: The policy is projected to bring in additional revenue which could be vital for funding public infrastructure and social programs. This could have a broad positive impact on the country, especially in terms of enhancing public services.[3]
• Fiscal Responsibility: The increased tax revenue can also help in reducing the national deficit or funding government debts, contributing to the overall fiscal health of the country.
• Progressive Nature of Tax: By increasing taxes on higher capital gains, the policy aims to ensure that wealthier individuals and entities pay a greater share, potentially reducing income inequality[3].

Forecasted Disadvantages:

• Investment Deterrence: There is a strong credible concern that the higher tax rate will discourage investments in various sectors, including the stock and real estate markets. This could slow economic growth, reduce market liquidity and push capital away from Canada.
• Effect on Retirement Planning: For many Canadians, investments are a crucial component of retirement planning. Higher taxes could significantly impact the growth of these investment portfolios, affecting future retirement funds.
• Real Estate Market Slowdown: The increased tax rate could particularly dampen the commercial real estate market by reducing transaction volumes and potentially depressing property values due to a decrease in buyer interest.
  

The Impact on the Real Estate Market

The commercial real estate market is likely to see a noticeable shift due to the increased tax burden on capital gains. Investors may hold onto properties longer, reducing the number of transactions and potentially leading to a less dynamic market. Furthermore, the development of new commercial properties will likely slow down, affecting the overall supply in the market.

Conclusion

The increase in capital gains tax is an aggressive and bold step in adjusting Canada’s tax system, and will likely provide significant headwinds to investment behaviours and economic competitiveness. Policymakers will need to monitor these changes closely to balance the intended benefits against the potential economic repercussions.

As Canadians prepare for these changes, understanding the full scope of the impacts—both positive and negative—will be crucial for individuals, businesses, and the economy as a whole.

References

1. https://www.ey.com/en_ca/tax/tax-alerts/2024/tax-alert-2024-no-28#:~:text=Budget%202024%20proposes%20to%20increase,that%20exceed%20%24250%2C000%20for%20individuals.
2. https://www.cfib-fcei.ca/site/capital-gains
3. https://budget.canada.ca/2024/report-rapport/chap8-en.html