Federal budget: Dodging a capital gains bullet

Our tax expert crunches the numbers on a feared change that didn’t come

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Whew!  The increased capital gains inclusion rates did not materialize in the 2016 Federal Budget; nor did additional taxation on employment stock options.   But, in case it’s an idea that comes back in the future, we thought it might be instructive to take a look at what might have happened. Here is how a 66 2/3% or 75% inclusion rate would have affected taxpayers.

It has been argued that, after taxes and inflation, capital gains do not provide an economic benefit over longer periods of time.  The 50% inclusion rate, in part, recognizes the fact that valuations over time must be adjusted for inflation.  Taxpayers are also able to offset capital gains with capital losses.

However, at a time when retirees face continued market volatility and greater longevity rates while  interest rates provide little or no returns after inflation. Any tax hit to their asset accumulations matters.   Let’s see how changing those rates will affect taxpayers in Canada.  Note the marginal tax rates in the $45,000 to $90,500 zones in particular:

Marginal tax rates on investment income at various income levels (assumed Ontario resident)

Marginal tax rates on investment income at various income levels (assumed Ontario resident)

Marginal Tax Rate on Capital Gains Interest Dividends
Taxable Income 50% 66 2/3% 75% 100% Large Small Bus
Under $41,536 10.03% 13.37% 15.04% 20.05% 20.05% -6.86% 6.13%
$41,537 to $45,282 12.08% 16.10% 18.11% 24.15% 24.15% -1.20% 10.93%
$45,283 to $73,145 14.83% 19.77% 22.24% 29.65% 29.65% 6.39% 17.37%
$73,146 to $83,075 15.74% 20.99% 23.61% 31.48% 31.48% 8.92% 19.51%
$83,076 to $86,176 16.95% 22.59% 25.42% 33.89% 33.89% 12.24% 22.33%
$86,177 to $90,563 18.96% 25.27% 28.43% 37.91% 37.91% 17.79% 27.03%
$90,564 to $140,388 21.71% 28.94% 32.56% 43.41% 43.41% 25.38% 33.46%
$140,389 to $150,000 23.21% 30.94% 34.81% 46.41% 46.41% 29.52% 36.97%
$150,001 to $200,000 23.99% 31.98% 35.98% 47.97% 47.97% 31.67% 38.80%
$200,001 to $220,000 25.99% 34.65% 38.98% 51.97% 51.97% 37.19% 43.48%
Over $220,000 26.77% 35.69% 40.15% 53.53% 53.53% 39.34% 45.30%

Table source: Knowledge Bureau

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