Canada increases capital gains tax for wealthy individuals and companies

Canada’s government has announced it will raise capital gains taxes on companies and wealthy individuals to help pay for billions in new spending aimed at making housing more affordable and improving the lives of young people.

The nation’s latest budget was tabled this week with a host of spending promises to increase housing supply and make life easier for young Canadians by increasing taxes on the wealthy.

It introduced tax increases for Canadian companies on 66% of their capital gains from the proceeds of asset sales, while high-earning individuals will be slugged at the same tax rate when they realise gains above $250,000 in a year.

Any gains under that amount will continue to be taxed at 50%.

Around 12% of Canadian companies would be subject to the higher inclusion rate, while around 0.13% of individuals (or approximately 40,000 taxpayers) with average incomes of $1.42 million could be affected.

The proposed changes represent the biggest tax increases in recent Canadian policymaking.

If adopted, they would come into effect in June.

‘Fair share’

In its budget document, the government said the tax increases are squarely aimed at prompting Canada’s wealthiest people to “pay their fair share”, given that a larger percentage of their income is generated from capital gains, while the majority of taxpayer income is from wages alone.

“Financing the investment we need through more debt would be unfair to young Canadians — we want them to inherit prosperity, not our unpaid bills,” the budget read.

“We have a better, fairer option… we are making the responsible choice [and] asking the wealthiest Canadians to pay their fair share.”

The changes are expected to generate $21.9 billion in revenue over five years, which could partially offset new spending allocated to initiatives such as increasing Canada’s housing supply.

Middle-class citizens would continue to benefit from various exemptions including the $250,000 annual threshold, tax-free savings accounts, a principal residence exemption and exemptions for registered pension plans.

Industry scepticism

Some industry experts have found a weak spot in the government’s prediction of how many Canadians will have capital gains exceeding $250,000 in 2025.

“[The prediction] does not account for behavioural responses to an increase in the capital gains inclusion rate,” they said.

“When there is a tax increase, those who are subject to the tax can change the way they manage their affairs, especially people with more means.”

“[They] have more opportunities to move money around, to do different ways of avoiding that tax.”

The government appeared to anticipate this criticism, pointing out in the budget that Canada has the “lowest marginal effective tax rate in the G7.”

Staying competitive

The government said the tax hike would not impact Canada’s ability to stay competitive.

“Businesses in most other countries, including the US, pay corporate income tax on 100% of their capital gains [so] with a two-thirds inclusion rate, corporate taxation in Canada remains competitive,” it said.

“By increasing the capital gains inclusion rate, we will tackle one of the most regressive elements in Canada’s tax system.”
“The current 50% inclusion rate disproportionately benefits the wealthy, who earn relatively more income from capital gains compared to the middle class.”

Entrepreneur’s incentive

The government’s 2024 budget also proposes the “Canadian Entrepreneurs’ Incentive” designed to reduce the inclusion rate to 33.3% on a lifetime maximum of $2m in eligible capital gains.

When the incentive is fully rolled out, entrepreneurs will have a combined exemption of at least $3.25m when selling all or part of a business.

The government said the incentive would result in a “one-third inclusion rate” where the limit will rise by $200,000 annually beginning in 2025 until it hits $2 million in 2034.

“This additional $2 million incentive will be available to founding investors in certain sectors who own at least 10% of shares in their business, and where the company has been their principal employment for at least five years,” it said.