Canada’s unproductive budget
After talking a lot about how we really—finally—need to get serious about the decades-long issue of Canadian productivity decline, the federal government decided that perhaps it wasn’t such a big priority at all.
Tuesday’s federal budget had a lot of changes in it, and MoneySense’s columnist and Certified Financial Planner Jason Heath has an excellent breakdown of how the 2024 federal budget might affect you and your finances.
But for the purposes of commenting on Canada’s productivity, we’ll focus exclusively on the changes to the taxation of capital gains. Until Tuesday’s announcement (which takes effect in 10 weeks) only 50% of a capital gain was included as taxable income on your annual tax return. That inclusion rate will now be 66.67% for capital gains within corporations and trusts. For individuals, the new inclusion rate will be applied to all capital gains over the $250,000 threshold each year.
A few brief points for consideration on who these new taxes rules might affect:
- This government has really cracked down on successful business owners who are using their corporations to shelter investments from taxation. First it was the 2018 changes around income splitting and passive income thresholds, and now we see capital gains hikes as well.
- Very few Canadians will pay this increased capital gains inclusion rate year-in and year-out. The $250,000 threshold is a relatively high one, and this is the picture that Finance Minister Chystia Freeland wants to paint when she talks about the “0.13%” who will be affected.
- However, a fair number of Canadians will be impacted by this new capital gains inclusion rate in the year they pass away. Canadians who own a cottage, a rental property or properties, and/or large non-registered investment accounts are quite likely to have more than $250,000 in capital gains on their final tax returns.
- There will be a substantial number of Canadians who rush to “get in under the wire” over the next few weeks and realize capital gains at the old 50% inclusion rate. Some are suggesting that these capital gains will likely be “pulled forward” from the next few years and will result in a one-time revenue boost for Ottawa.
While reasonable people can disagree on who should shoulder a higher tax burden and what is considered a “fair share” in Canada, there is no doubt that these new taxes will continue to discourage investment within our country. (Read: How will the changes to capital gains in Canada affect tech sector?) It’s also part of a budget that added substantially more complexity to our already-too-complex tax code. The sheer difficulty of calculating your taxes and trying to plan for long-term tax efficiency in Canada is yet another drag on productivity.
Former finance minister Bill Morneau was politely scathing in his commentary on the new changes, saying: “This was very clearly something that, while I was there, we resisted. We resisted it for a very specific reason—we were concerned about the growth of the country… I don’t think there’s any way to sugar coat it. It’s a challenge. It’s probably very troubling for many investors.”
The rush to raise taxes versus finding efficiencies in current government spending is a tough pill to swallow for many, especially in light of the exploding numbers of public employees in Canada.
From the chart above, it doesn’t appear that Canadians were lacking for reasons not to start their own corporations or invest in innovative growth.
