In the days before the Federal budget is revealed, rumours continue to swirl that the Liberals are going to raise taxes in a roundabout way, by reducing the tax break Canadians receive from capital gains.
In the 2007 Federal budget, the Conservatives increased the lifetime capital gains exemption 50% to $750,000, which means that the first $750,000 of the sale price of each shareholders company “Shares” will have a capital gain which is exempt from all income taxes. The rate has changed over the years, so its’ not without reason to believe it might change again, especially in light of the money the Liberals promised to spend.
Currently, under the Income Tax Act, 50% of capital gains, on everything from property to stocks and mutual funds, are taxed. The effective tax rate is therefore half of the marginal tax rate. In some provinces, the current capital gains rate means tax of more than 25% on investments for high income investors.
Speculation is that the Liberals might move that taxable amount to 2/3’rds or 75% while they pay for all their election promises, and then eventually returning that to 50% near election time to encourage voter support.
With capital gains being taxed less heavily than dividends, there is little incentive for business owners to take cash out of their business and pay the taxes via dividends when they can just sell the company, pay the capital gain, and then start again.
The Liberals want to be more friendly to small business owners and the middle class, it will be interesting to see if they change this rate in the budget since they did not mention this in their election campaign.
A change of this magnitude might trigger an asset sale, or cool the real estate market for people who buy assets, then flip them within a short-term period of time, realizing a gain on the sale.