March 11, 2022 by David Christianson
There is a potential new tax deadline that many tax professionals are talking about, and that’s the date of the next federal budget, instead of the filing deadline of April 30.
Specifically, there are fears of an increase in the capital gains inclusion rate and the possibility of other forms of tax increases.
While we don’t know the date of the federal budget, it should be well before the end of April. What we know for sure is that the government has racked up huge deficits over the last two fiscal years, and may be looking at ways to raise revenues to address those deficits.
For the last decade or so, realized capital gains have had a 50% inclusion rate. This means that half of the gain on the sale of any capital asset is included in taxable income.
So, if you invest $10,000 in stocks, mutual funds or ETF’s and they grow to $20,000, you pay no tax on the growth while you continue to hold that asset.
However, if you sell the asset for net proceeds of $20,000, then you have a $10,000 gross realized gain. Half of that gain must be included on your income tax return in the year of sale. (This does not apply to a GIC or bond on which you have paid tax along the way on 100% of the income earned, instead of 50%.)
The same rules apply to the sale of investment real estate, farmland, cottages (if not qualifying as a principal residence) or other capital assets.
Way back when I was a young planner, we had a tax-free exclusion on the first $100,000 of capital gains. I have also seen a 75% inclusion rate and a 67% inclusion rate over the years.
There’s a lot of speculation among accountants that this inclusion rate might increase. Politicians can argue - with only limited validity - that this is only an attack on the rich, because people who claim capital gains have higher than average incomes.
The shortcoming of that argument is that when people claim a capital gain - like a pensioner with a $40,000 income selling the family’s rural property for $100,000 - their income is automatically higher than average, but often only once.
Either way, some people are selling capital assets with large gains now to guarantee themselves the 50% inclusion rate, choosing to pay the tax now rather than defer it. If something is to be sold in 2022 anyway, then it makes sense to do it before the budget.
However, if your intention is to hold the asset indefinitely, then the tax deferral may be worth more, even if the inclusion rate is higher in the future.
The Prime Minister has given direction to the finance minister to introduce new taxes on luxury cars, boats and airplanes (because we all buy those!), a 15% minimum tax on high income earners (I pay 54% - where do I sign up!) and an extra tax on large banks and insurance companies, while requiring them to pay a “Canada Recovery Dividend”.
Several professional groups have made submissions to the government that any tax increases should be on consumption taxes like GST, and not on income taxes.
There are even fears that gains on home sales over a certain amount might become taxable. But this is all speculation.
Again, what we know is that the federal government reported a budget deficit of $274 billion, according to Stats Canada, for fiscal 2020. Although this will be much lower in 2021 and should fall further in 2022 based on recent strong economic growth, this is a federal government that may be clearly hungry for fresh revenue, so fasten your seat belts.
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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax, insurance and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIM is recipient of the FP Canada™ Fellow (FCFP) Distinction, and repeatedly named a Top 50 Financial Advisor in Canada. He is a Portfolio Manager and Senior Advisor with Christianson Wealth Advisors at National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.