The pandemic has led to a significant amount of spending by the federal and provincial governments. How will the country pay for it all? Speculation is starting to turn to what tax increases may be coming—and when.
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Recent estimates from the Parliamentary Budget Officer suggest that about $226 billion in pandemic emergency aid will cause this year’s federal deficit to hit almost $329 billion. The provinces and territories have also ramped up support for citizens.
Tax increases sometimes follow deficit spending, as governments try to increase revenues by raising taxes. So, lots of taxpayers are wondering what tax increases could be coming.
Tax changes can be introduced at any time, but generally they happen as part of the federal budget. Budget 2020 was supposed to have been tabled on March 30, but with the lockdown that began a couple weeks prior, it was delayed. While it is possible there could be tax changes before next year’s spring budget, it may be more likely that a March 2021 budget could be the timing for any significant tax announcements.
It is important to note that when we speculate on tax changes, it really is just that— speculation. Some or all of these may never come to pass, let alone next spring. But here goes.…
For the past 20 years, capital gains in Canada have been 50% taxable. This is the income inclusion rate that generally applies to non-registered investments, cottages, rental properties and some businesses, among other assets, with half of a capital gain being tax-free. For the 2020 tax year, there is a $883,384 lifetime capital gains exemption on the sale of certain types of businesses, particularly qualified small business corporation shares and qualified farm and fishing properties.
In 2000, the inclusion rate for a capital gain was changed twice—from 75% to 66.66%, then to 50%, all in one year. Between 1984 and 1994, there was a $100,000 lifetime capital gains exemption that applied broadly to most capital assets. Prior to 1972, capital gains were not taxable in Canada.
In 2016, there was a lot of speculation prior to the budget that the Liberals were going to raise the capital gains inclusion rate. It never happened, but has been a lingering worry for some taxpayers over the past few years, and the current budget deficit has cast a spotlight on capital gains again.
If the capital gains inclusion rate were to increase, anyone selling a taxable investment like a stock, mutual fund, exchange-traded fund, cottage, rental property or business may have a higher tax bill to pay as a result. The thing with capital gains is that they are only taxable once realized and after a capital asset is sold. So, if someone speculated an inclusion rate increase was coming, and sold proactively to avoid a speculated tax increase, they may not only pay tax now that they do not need to pay, but if they are wrong about locking in a lower rate now, they may pay it for no reason at all.
If someone was planning a sale of a capital asset in the next couple years, I suppose they could accelerate that sale now, but letting tax dictate investment, real estate or business decisions may not be the best order of priorities.
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The tax-free principal residence exemption has helped plenty of Canadians earn tax-free profits over the past 20 years as real estate prices in many Canadian cities have soared.
Real estate has become a political issue, given that affordability is a major problem for many young people, in particular, who have not been able to build equity along the way. There have been attempts to dampen real estate growth rates by introducing a mortgage stress test and a Non-Resident Speculation Tax, amongst other initiatives.
A tax on principal residence profits could be an option for the government to accomplish two goals: raising taxes and lowering the pace of real estate price growth.
In the United States, the IRS allows a taxpayer to exclude up to $250,000 from their income when selling their main home. There is a $500,000 exemption for married taxpayers. For context, some detached homes in Vancouver and Toronto can appreciate by $250,000 in a single year.
If I had to be on the most likely tax increase to be tabled next spring, I think this would be the one, but likely with a high exemption like the U.S.
Discussion of a wealth tax by the Democratic party has led to wealth tax becoming an election issue in the U.S. There are several European countries, like France, Switzerland and Norway, that currently have taxes payable based on a portion of an individual’s net worth.
In France currently, a tax of 0.5% to 1.5% is levied only on real estate. In Switzerland, tax rates are up to 0.94% depending on the region, charged based on worldwide assets. Norway charges a 0.85% wealth tax based on a percentage of assets, with only a portion of a primary residence included, and higher inclusion rates for real estate, stocks and secondary residence market values.
Here in Canada, British Columbia already has a wealth tax of sorts on real estate valued over $3 million. A report this summer from the Parliamentary Budget Officer estimated a wealth tax of 1% on taxpayers with family net worth of over $20 million—or about 13,800 families nationally—would raise about $5.6 billion in annual federal tax revenue.
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There are other potential tax increases that could be introduced for Canadians.
A sales tax increase federally (GST) or provincially (HST/QST) is an option but could be difficult for cash-strapped consumers, as well as businesses that have been hit hard. That makes it unlikely.
Personal tax could increase, but particularly for higher income taxpayers, rates in several provinces are already over 50%.
There were corporate tax rule and rate changes introduced by the federal government as of Jan. 1, 2018, and the federal government has been vocal about closing what they saw as tax loopholes for business owners. That could make businesses a potential target again, but with so many small businesses on the ropes already, it could be bigger businesses, rather than small businesses, that are targeted.
It will be interesting to see what tax increases are introduced, and if this coming spring may be too early for the federal or provincial governments to start to raise taxes.
Still, I do not think I would make any personal financial decisions based on my tax speculation, or anyone else’s.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
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How might removing the principal residence exemption work? I assume any gain earned up to the effective date of change would continue to be exempt from tax. If so, would everyone need to have their current principal residence appraised as of the date of change to establish the base value of their home for future taxes?
If, as you speculate, there is a personal residence capital gains tax the only fair way to implement it would be have “mark to market” price for existing properties.
Tax going forward capital gains but to tax on the gains made before the tax implementation date would be unethical. An exemption is not sufficient. Also would capital losses be allowed? Not all real estate has increased in value. Also this could be construed to ‘punish’ two major (maybe 3) markets disproportionately. Not really fair is it. Our US counterparts are also allowed to deduct things like mortgage interest – not so in Canada as personal real estate is purchased with already taxed dollars.
Any government implementing a tax like this is surely committing political suicide.
Governments are always so short-sighted. Instead of raising any taxes they should take a page out of the reports produced by the Canadian Taxpayers Federation (CFT) and actually support Canadian businesses and taxpayers by lowering both business and personal taxes, NOT introducing new taxes.
The majority of Canadians have invested in a principle residence not specifically for potential gains, but as a place to live and call home, with any potential gains (there have been many who have also lost money on the sale of their homes) being incorporated as part of their retirement savings. For many self-employed, this is one of the only means of amassing any significant retirement savings.
There are several other more palatable and more effective ways to offset our huge deficits:
1) Cut government spending, especially on needless or non-priority items – Meghan and Harry’s protection ($93,000), Payette’s $530,000 home renos, and so very much more;
2) Reduce the number of bureaucrats at all levels by 15% and cut those bureaucrat’s salaries by 15%, while also cutting the salaries of members of parliament and senators;
3) Cut government pensions at all levels -in Alberta thousands of city employees are eligible for 2nd and 3rd pensions, totaling more than $24.8 million in 2019, while many taxpayers are losing their homes and businesses;
4) Stop corporate welfare, especially those disguised as “green” policy like the half-billion dollars of of Federal and provincial taxpayers money given to Ford to support the production of electric vehicles. (Ford is the one of the largest corporations in the world, with a CEO making a yearly salary of US$17.4 million in 2019- more than 370 times the average Canadian household income);
5) Lower hydro bills – especially in Ontario where residents pay 22% more for than any other province for their electricity and dome businesses pay 65% more largely due to botched and ill-thought out past green policies and bad renewable energy deals;
6) Lower gas taxes – In Ontario we now pay 5 separate gas taxes, adding $0.44 to the cost of every litre- prolonged studies in Australia and elsewhere show that “carbon taxes” do nothing to offset any purported anthropogenic global warming;
7) Stop kowtowing to unions- especially those of government bodies like teachers unions. Demands of all unions in this country have become outrageous and contribute to divisiveness and economic imbalances; and
8) Stop financial support of all special interest groups as these again create social and economic imbalances and divisiveness that leads to bigotry.
Jason – historically, when changes to the Capital Gains inclusion rate happen, are they retroactive to January 1 or do they become law from the date of the budget forward?
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
This would be horrible to tax personal residential homes we already pay land transfer tax as properties are purchased the government makes billions especially in this hot real estate market! If they tax on our personal homes capital gains would be devastating I am self employed and count on my future equity for retirement and to help my kids. Also the government is charging such high rates in yearly property taxes it’s unthinkable they could even consider this as an option
Kathy
I see only one way to ease the tax burden on Canadians, don’t vote for Liberals and their ridiculous spending habits.
Cheers to Catherine Butella you should run for office, great comments.
If a rental home purchased in August 2020 is sold in July 2021 (under 12 months)is the capital gain taxed at a higher marginal tax rate? ie. short term capital gain?
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with a qualified advisor.