Canadian policy makers claim they’re cracking down on the rich, but they know it’s not the case. Budget 2024 will raise the capital gains tax, stating only a small number of the wealthiest taxpayers will be impacted. Statistics Canada (Stat Can) data provided to policymakers shows that’s not the case, impacting 7x the number implied. The vast majority are also less likely to be rich and more likely to be receiving a one-time windfall. In addition, the policy appears to be timed to capture an upcoming surge from the silver tsunami—targeting Boomers in trades and professional services. Most people pictured the Monopoly Man being targeted, not their plumber near-retirement. What gives?
Canada Proposes Raising Capital Gains Inclusion Rate To 66.7%
Capital gains are profits made on the sale, or deemed sale, of an asset. It can be a business, car, cottage, stocks, etc., if its value is more than when it was acquired, it’s a capital gain. Most policymakers seem to be intentionally branding it as a tax that hits the rich. That’s not the case though, since it’s typically applied to windfalls, such as selling a business in retirement or disposing of inherited property.
Since capital gains are typically applied to windfalls, they’re less aggressively taxed. For instance, the US taxes capital gains at a rate no more than 15%, with exemptions sometimes pushing it down to 0%. In Canada, the tax rate reduction is done via the inclusion rate, taxing only a share of the profits as income.
Canada is proposing to raise the inclusion rate from 50% to 66.7% by mid-year. The first $250k will be eligible for a reduced inclusion rate of 50% for now. It’s unclear if the progressive inclusion will be permanent or a transition at this point.
Canada To Tax The Rich… But Who’s Rich?
Budget 2024 argues only the wealthiest Canadians would have been impacted by this shift in policy. It states just 0.13% (~40,000) of the wealthiest residents will pay this annually. Great, pour one out for the top 0.1% of top earners and let’s move on. It’s not worth any time defending the rich, they have many tools to minimize liabilities and won’t be impacted anyway.
The problem is this isn’t a tax for the “rich,” it targets one-time windfalls. Statistics Canada (Stat Can) provided policymakers with data. It shows 25.1 k tax filers in 2011 would pay the new rate, but just 170 (0.7%) would pay it in subsequent years.
Stat Can also ran the numbers on the 34,000 people who reported over $250k in capital gains in 2016. Just 700 (2%) made another filing meeting that threshold in subsequent years. A little odd. The rich aren’t usually just rich for a year, right?
Budget 2024 is factually correct that only 0.13% of tax filers will be impacted in the year. What it leaves out is the fact these aren’t the same people every year. Roughly 300,000 people would have been hit by the increase over the past 10 years. That’s more than 7x the number implied, or roughly 1.7% of tax families.
That estimate was also retroactive. The timing of the new measures shows this is being rolled out at a time where the target demographic will surge. A period policymakers have targeted immigration to address—the silver tsunami, a.k.a. the retirement cliff.
Canadian Entrepreneurs Will Be A Big Target In Coming Years
At least there is a notable exception for entrepreneurs, right?
Entrepreneurs will see the inclusion rate fall to 33% for a maximum of $2 million. That brings reduced taxation for up to $3.25 million of wealth when selling part or all of their business. The catch is that’s not immediate, and begins next year in phases. Starting in 2025, $200k will be added to the reduced rate per year until it hits the full amount in 2034. That happens to be the whole window of the expected Silver Tsunami.
The Canadian Federation of Independent Business (CFIB) estimates 76% of existing small business owners will retire over this period. It represents nearly $2 trillion in assets transferred, over three-quarters due to retirement. Not necessarily wealthy households, but often owner-operators. Many who diverted their funds from income to be reinvested in their business.
Doctors are often where most of the attention goes. This taxation increase was notably shot down when it was billed as a “doctor tax” back in the late 2010s. But trades with much lower annual incomes also fall into this range. A restaurant that’s survived for a while and leases its building, is likely to hit this tax range. Same with many small trade businesses, like plumbers or roofers. Assets that don’t traditionally fit into a retirement plan but are just as important.
It would be an odd coincidence if policymakers didn’t realize this tax windfall would be coming. Especially since the same policymakers geared immigration policies to address the same issue.
Canada—It’s Easy To Get In, But Getting Out? Not So Much
Leaving Canada after paying a lifetime of taxes? Not so fast, Canada will want its pound of flesh first. Many don’t realize the country has a departure tax, requiring capital gains paid on assets leaving the country. Even assets not sold are “deemed sold” upon exit.
That means for tax purposes, an asset is sold at fair market value (FMV) and reacquired when it leaves. That jewelry you bought in 1981? Don’t plan on leaving without paying taxes on it. Might want to keep the 40 year old receipt to prove acquisition costs too.
As a result, anyone planning to retire elsewhere will be subject to the new capital gains rate if passed. Ditto for those who moved to Canada for work, then find themselves relocating for work. People moving $250k in gains from their retirement portfolio are considered rich subject to higher taxation, but $1 million on a primary residence is considered Middle Class. Funny how that works, eh?
Canada is bracing itself for another big windfall here. From 2020 to 2023, emigration (those leaving permanently) jumped 50% to 95k annually. In addition, roughly 1 in 7 immigrants leave within a few years of arriving. Canada knows about the former due to their tax filing, but has difficulty measuring the latter.
Fun fact: this is partially why Canada’s population growth skews to the upside. Stat Can acknowledges it’s difficult to tell who has already left vs who just stopped filing taxes and using services, without an exit tax filing.
Flippers? Nah, Family Cottages Are More Likely Targets
One narrative we’ve seen shared is that this targets speculators, housing or equities. That’s not really the case, since capital gains are irregular income. If the proceeds are the result of regular trade and/or a primary income source, it’s not a capital gain. Instead it qualifies as regular income/revenue for the purposes of taxation.
The CRA has made this crystal clear when it comes to property flipping. Especially when the property was held for less than a year before being sold. Ditto with rapid trades in stocks for income, and superficial losses. Just because someone claims otherwise and doesn’t get audited, doesn’t mean the CRA won’t circle back and collect later.
The type of property to get hit with this increased rate is more likely a family cottage inherited. A sudden increase in listings implies more than a few people might be trying to get ahead of that one.
None of this is to imply Canada should or shouldn’t apply a new rate of taxation. It’s simply to highlight the stated impact may not be the intended one. The goal is to target the rich, but the very same policymakers can’t even define the Middle Class.
Further, if the taxation threshold is equal to the minimum annual income to qualify for a mortgage in certain regions, is this acknowledgement that only the rich can purchase a home? It’s a jumbled mess of diversionary politics, without much justification of how it helps.
Not a great idea to lower the incentive to start a business while increase the incentive to put money into a primary residence, but we all know what the game plan is.
Home prices 2 da moon. No one needs to work if we can 4 immigrants per person to pay for a rental property.
You joke but all policies are set to reward pumping more money into your primary residence and less into any other area. Borrowing more from RRSPs for down payments, a downpayment tax exempt fund, etc.
Every single policy from this government is focused on how you’ll pump more money into your home, and how entrepreneurs and small business will pay more in taxes so they can redirect it their friends’ corporate welfare account.
It’s not possible to have affordable housing when policymakers keep directing funds away from every area
Canada financial system is entirely dependent upon the valuation of RE/CRE as significant portion of “wealth.”
Some people in YYZ and YVR have been able to live a life or privilege, at the expense of their neighbours(children), via perpetual HELOC now over 20 years.
If price declines that kicks irreversible off liquidation cascade.
Further evidenced when former MP Vaughan advise that -10% to common RE is untenable.
Ergo “housing affordability” defined as extension/expansion of credit. NOT cost/income ratio target as per all of history.
Did you guys report on the Finance minister’s “windfall” farm sale? It seems that closed then the next year they’re really into taxing anyone else for the same type of increase.
I have read a lot of articles on the new tax, this is the first I have read that does an excellent analysis of who is actually going to be hit. I am tired of politicians talking of soaking the rich and paying their fair share when in fact they are targeting small business owners and professionals who have worked all their lives and are finally cashing out for retirement selling the one asset they have so they can retire.
250k Canadian is only 185k USD. The average marginal tax rate is going to be in excess of 50% in Canada while at that level in the US you will pay 22% to 30% depending on the state.
Canada has become a trap where migrants are attracted to the bright lights and appearance of potential success of a first world country but in reality is it will always be out of reach with high taxes and overly beurocratic policies. The people I see successful are the ones who skirt the system, work under the table and avoid the taxes altogether.
One of the most flawed tax grabes. Taxing after tax money again. Governments love inflation.
Example you bought that family cottage with after tax money 40 years ago for $60,000 inflation now makes it worth $800,000 BUT the government never uses inflation to adjust the cost base to that new number. Your ACB with work you have done on cottage brings you cost base to $200,000 they are the winners when you sold for 1 million. If inflation adjustments where mage the gain would only be $200,000 yielding them less revenue. The government has no idea and stastics who owns what and how much till you report income on your return. I know in my circle of people 80 % will be affected when the time comes. But Governments fail to see that eventually this gain will be made and spent in the economy and they will collect Hst Gst and income taxes from This money.
Since 2015 we have been turning into a autocratic socialist state with the goal of making everyone equally poor except for a few at the top who are well connected and very rich. Trudeau and his dad always were big fans of such regimes and admired how government operated in Cuba and China.
This is the first incoherent comment I’ve seen in the comment section, which I find wonderful.
Quick question, why are you so convinced that all these issues with Canada suddenly appeared in 2015 and not the 80s and Brian Mulroney’s premiership?
The current state of affairs is a direct result of decades of Austerity measures and tax breaks for large corporations and the ultrarich. Trudeau definitely shares blame in this, but he wasn’t the first. And I suspect he won’t be the last.
Detailed article longer than usual but worth the read.
The government is broke and has overspent in all areas with no results only broken promises and causing financial ruin for many forcing those nearing retirement to work longer than planned, many have had their savings evaporated. Gen Z and Millennials, said it before, they are coming for your inheritances.
“Soldiers hands in the trenches get dirty
And stay that way throughout the war.
The Politicians who deal out death with words
Have clean fingernails.”
Thank you for providing the first article I’ve read that states it clearly: it’s not the rich but the retirees being hit on this tax! I am almost 70 and have worked 2 jobs my entire life as a single parent to get ahead and not put any burden on my family should I live longer life and get medical issues etc. And have money to give my family on my death. I still work part time. I set up a retirement plan to begin to sell my properties now 20+ years after purchasing so I can slow down and maybe travel a bit for ME. This plan just got ripped away. I’m not rich but do fit into this boomer category. I feel punished for not draining the government or my family through all my years. And who do I complain to?
There is no sympathy for me due to the belief that I am rich and look I have more than one property! Good luck in this simplified belief. I grew up in poverty and foster home experiences, due to a father with significant mental illness. Why say all this? Because most people think I’m the “bad guy” with several properties+ $$$. Wake up. I’m a normal Canadian that grew up disadvantaged yet did not bleed the system and for what? To have all the years of working hard only to have my dream dismantled at the finish line? Well my vote is only one but to me it will count. I voted for both Trudeau’s all these years. And I have lost total faith in hard working ethics. I don’t have a partner due to the many years of going to school, taking 10 years to pay back student loans and building a business and yes, investing in property. What happened to my dream?
Please remove my last name
Done!
This is the first bit of coverage that gave a coherent argument as to why this may be a problem. I can’t say I’ll change my mind immediately but I’ll certainly look into this to try and understand the issue more.
Thank you.
This is a coercive move from the government as they see the major demographic shift coming down the pipe. Boomers had the opportunity to build wealth throughout their working years. Most decided to pile into RE, which is classified as a non productive asset. When you invest, you’re taking on risk.
Most people did not recognize the peak prices back in 2021-2022 and became selfish thinking prices would continue to climb not realizing affordability was being pushed to the limit. There are plenty of books that explain this process was coming.
If people didn’t understand what was happening and did not take the chance to unload their rental properties when they had the chance, this is why the government took this final step to push them over the line and force them to sell without taking the gains they thought they would have, and transferring the gains into the governments pockets.
This is what needs to be done so that the up and coming generations have a chance to make it in life and not be burdened with the record high debt levels, mostly built from the boomer generations, which are going to transition from producers to consumers and burden the health care system that millennials and gen Z will have to pay for.
Boomers thought they could retire and live on passive income from rental units, they should have thought twice and read the signs.
I guess with the RE frenzy everyone forgot about the ole “buy low, sell high”
As an electrician, there is not even close to the value built in these old houses that people think.
IMO This is a move to either crash the market so that old houses can be demolished and turned into high density multi units, or crash the market so multi billion $$ corporations can swoop in and perform the actions mentioned above to rent back to you.
Why do you guys keep removing my comments?
I didn’t say anything against the rules.