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FORUM: A primer on changes to the capital tax (June 2024)

July 19th, 2024 · No Comments

Finance Minister interprets tax changes made in recent budget

By Chrystia Freeland

If we were creating our tax system from scratch, what choices would we make as Canadians? Would we give the greatest tax advantages to those who make the most money? Or would we insist on each of us paying our fair share to keep Canada strong?

I’m confident most of us would choose fairness. It’s the Canadian way. That’s why our government introduced changes that will result in a small number of well-off Canadians paying a little more tax when they sell a successful investment. 

That revenue will, in turn, pay for investments that will help all Canadians, especially our younger generations. 

It will help fund our plan to build more homes, faster, so more younger Canadians can achieve the dream of home ownership. It will allow us to expand $10-a-day childcare, which is already saving young parents thousands of dollars a year. And it will support important new programs like national pharmacare, which will provide free diabetes medication and free contraceptives, and the Canadian Dental Care Plan, which is already helping two million Canadians across the country go to the dentist.

Canada could finance these critical investments by taking on more debt. But that would put an unfair burden on younger generations. Fiscal responsibility matters— and our fiscally responsible approach is in part what enabled Canada to lower interest rates this past week— the first G7 country to do so. 

As I walk you through the details of the coming tax reform, I want to start by emphasizing that the changes are focused exclusively on investment profits known as “capital gains.” 

When someone sells an investment that has appreciated in value—like a portfolio of stocks or a rental property—they accrue a capital gain. In Canada, these gains are taxed below the rate that we pay on income. Today, in fact, only half of the gain is taxed. So, if someone makes a $2 million profit on a stock sale, they pay tax on only $1 million of that gain. (One million is entirely tax free.)

Here’s one consequence of this preferential treatment of capital gains: many of the wealthiest Canadians make most of their money through investments, not income. And we applaud their success. But because of how investment gains are taxed, well-off Canadians can wind up paying a lower overall tax rate than a nurse or a carpenter. 

That’s not fair. And so, beginning June 25, well-off Canadians will need to pay tax on two-thirds of their capital gains, instead of just one half. 

A few important points about this change:

Canadians will continue to pay no capital gains tax when they sell their principal residence. Any money you make on the sale of your home is yours to keep.

The tax changes do not apply to the first $250,000 of capital gains every year. The higher rate only applies to gains above this $250,000 threshold. Most Canadians will still be able to sell successful investments without paying a higher rate. For example, a couple who own a rental apartment will pay no additional tax on their first $500,000 in profit from a sale. 

We’re increasing the lifetime capital gains exemption for those who sell their small business or fishing or farming property. Gains up to $1.25 million will now be tax-free.

To encourage innovation and job creation, we are introducing a new incentive for entrepreneurs that will reduce the amount of tax they pay on capital gains and increase the lifetime exemption on the sale of all or part of their business.

Brian Mulroney’s Conservative government raised the capital gain inclusion rate to 75 per cent—higher than we are proposing. And the rate was 75 per cent throughout the 1990s, a decade of strong economic growth. 

 In the end, we estimate that only 0.13 per cent of Canadians—with an average annual income of $1.4 million—will be affected by this change in any given year. But millions more, especially younger Canadians, will benefit from it.

Our proposed reform to the tax system was voted on in the House of Commons last month. It is telling to see which members of Parliament voted against the principle of more tax fairness for Canadians and shifting a system that confers significant benefits to those at the top.

Chrystia Freeland is MP for University—Rosedale and Deputy Prime Minister and Finance Minister of Canada

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