Controversial capital gains change now in effect

A controversial increase to the capital gains inclusion rate is now in effect despite strong pushback from small businesses, farmers and medical professionals.

Starting Tuesday, individuals with capital gains of more than $250,000 will be subject to an inclusion rate of 67 per cent, up from 50 per cent before. For corporations, all capital gains are now subject to the two-thirds inclusion rate.

The federal government says the move will improve tax fairness and increase federal revenues by $19.4 billion over five years, with a bulk of that money flowing into federal coffers this year. Budget 2024 shows the change to the inclusion rate will bring in an estimated $6.9 billion dollars this fiscal year.

The tax change applies to profits made from the sale of secondary properties or investments, including stocks or bonds and family cottages. The new inclusion rate does not change the tax rate itself, which will continue to be an individual or corporation’s marginal rate, but increases the taxable portion of that gain.

“Do you want to live in a country where we make the investments we need — in health care, in housing, in old age pensions — but we lack the political will to pay for them, and choose instead to pass a ballooning debt onto our children?” Finance Minister and Deputy Prime Minister Chrystia Freeland asked in Toronto earlier this month.

EY Canada tax policy leader Fred O’Riordan says the government appears to be using this tax change to keep the federal deficit below $40 billion.

“Instead of doing (it) immediately effective Budget Day, which is why most of them are done, they gave that window of time a couple of months until June 25,” O’Riordan said. “A lot of us believe that the main reason they did that was to encourage people to crystallize, to realize capital gains earlier than they might otherwise and then bring additional tax revenue into this fiscal year.”

Law firms and other corporations who regularly handle capital gains say that since the measures were announced in Budget 2024, clients have rushed to realize their gains before the changes took effect on June 25.

“I have heard from some Canadians who are concerned,” Freeland said in Toronto earlier this month. “No one likes paying more tax, even those who can afford it the most.”

But while the Liberals contend this increase will only impact 0.13 per cent of Canadians with capital gains income, an array of groups from small businesses to medical professional and farmers have called for immediate changes.

“Politically speaking, you would think there would be some room for manoeuvring, but they haven’t budged at all and you’ve got to think that it’s because they really want the revenue,” O’Riordan said.

Details about the change were included in what is called a “Notice of Ways and Means Motion” that was approved by the House before it rose in June. The legislative details of the tax change are expected to be released later this summer, with the bill itself voted on when Parliament returns in the fall.

Although the change is now in effect, O’Riordan believes the government still has time to make carve-outs.

“They really painted themselves in a corner but who knows,” he said. “There’s still wiggle room there if they want to change their mind.”

Farmers say increase ‘targets’ them

Last week, a survey released by the Canadian Federation of Independent Business (CFIB) found that half of all small-business owners in Canada will be affected by the change and another 45 per cent said the tax would affect the investments they hold privately.

Ottawa has said only 12.6 per cent of Canada’s corporations reported capital gains in 2022.

One of the loudest groups of small businesses pushing the federal government to reverse course are farmers who say family-owned farms across Canada will be negatively affected.

Günter Jochum’s family owns and operates a wheat farm just outside Winnipeg and calls the change “appalling,” He says the increase will make it harder to transfer the family farm to his daughter, Fiona, when she’s ready to take over.

While farmers do have to pay capital gains on the profits from the sale of their farmland, a portion of the property considered by the Canada Revenue Agency to be a primary residence is excluded.

“My parents are still drawing from the farm. I myself draw from the farm,” he said. “These changes will just mean that there is more of a tax burden now and it will make it more difficult for my daughter to maintain the farm and be able to satisfy all three households.”

Jochum, who is also president of the Wheat Growers Association, said the tax change makes farming less attractive and could result in more farms being sold outright instead of passed on to the next generation.

“I get what they’re trying to do; they’re trying to hit the really big corporations who make multibillion dollars,” Jochum said. “That’s not farmers who are small businesses, and we somehow get lumped into that and that is very dangerous.”

The government recently increased the Lifetime Capital Gains Exemption (LCGE) that allows tax-free capital gains up to a new $1.25 million on the sale of a qualified property. Prior to June 25, the LCGE limit for small business shares, farms and fishing properties was $1.016 million.

While that cumulative lifetime exemption is helpful, Jochum argues it is simply not enough. Jochum says his accountant advised him that despite programs like the LCGE meant to help farmers, he should expect to pay about 30 per cent more on the eventual sale of his farm.

“You want to stick everything into your business to build it up and take it to where it is today,” Jochum said, adding he has chosen to invest in his farm rather than into an RRSP. “For the government to come along and tap into my retirement, and say, ‘Yeah, we want to tax your retirement 30 per cent more,’ is really offensive.”

Doctors ‘disappointed’ with tax hike

Medical professionals have also joined the chorus of voices calling for change. Most family doctors are considered corporations for tax purposes and will now be subject to the higher inclusion rate.

Canadian Medical Association president Dr. Joss Reimer says she is “disappointed” the government made no exceptions for family doctors. Unlike individuals, the higher inclusion rate affects all capital gains earned by corporations. Reimer fears that difference will impact the bottom line of many family practices and could make physicians less likely to enter or stay in family practice.

“We know that there are so many Canadians who already don’t have access to a health-care provider,” she said. “Anything that’s going to cause any of our physicians to consider not doing family medicine or to decrease their hours is really concerning.”

Reimer says she is hopeful the government will engage in conversations with members of the medical community over the summer. One solution, she says, is allowing family physicians to use their personal $250,000 annual exemption for their corporation.

“Then we would still be taxed just like everybody else, but it treats us more like the individuals that we are,” she said. “We’re not the same as the big companies who have their shareholders … We’re just trying to save for our retirements, from maternity leave or sick leave, all of those things that physicians aren’t usually eligible to get.”

New measures for entrepreneurs

The government’s ways and means motion also includes a new Canadian Entrepreneurs’ Incentive that was promised in the spring budget.

This measure will reduce the inclusion rate to 33 per cent on a lifetime maximum of $2 million on eligible capital gains. The limit will start with $200,000 in 2025 and increase by that amount every year until it reaches the $2-million threshold in 2034.

Entrepreneurs may also use the total lifetime capital gains exemption of $1.25 million, resulting in a combined exemption of at least $3.25 million.

What is not changing

The measures coming into effect today will not impact capital gains on tax-sheltered savings that are currently exempt.

This includes:

1. 
   Capital gains from selling a principal residence
2. 
   Income earned in tax-sheltered savings accounts, like tax-free savings accounts (TFSA), First Home Savings Account (FHSA), registered retirement savings plan (RRSP) or registered education savings plan (RESP)
3. 
   Pension income or capital gains earned by registered pension plans

The first $250,000 earned in capital gains will continue to be subject to the 50 per cent inclusion rate for individuals.