Investing

Cap Gain Inclusion rate changing?

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Newbie
Sep 28, 2019
20 posts
9 upvotes

Cap Gain Inclusion rate changing?

I saw some recent speculation that the capital gain tax inclusion rate here in Canada could go to 75%, from 50%. Just wondering, how would that work, in light of unrealized gains many of us have.
15 replies
Deal Addict
User avatar
Jan 28, 2012
1785 posts
693 upvotes
Probably means any gains you claim from now on are at 75% not 50%

I think you are asking if they will let you prorate it to the old rate but that's probably too complicated and defeats the purpose of the tax grab. If you have cap gains to claim you should probably do it before the rules change.
Sr. Member
Feb 13, 2008
977 posts
765 upvotes
Edmonton, AB
The Federal NDP stated last October on election night they want it back to 75%.
Deal Addict
Jun 15, 2012
2837 posts
1011 upvotes
Saskatoon
In the light of enormous budget deficit. They might just do that. Desperate times call for desperate measures.
One way the Liberals could raise billions in tax revenue immediately would be to increase the capital gains inclusion rate. The NDP, which promised in its election platform to raise the inclusion rate from 50% to 75%, would likely support such a move.

Raising the capital gains rate would fit well with the Liberals’ policy goal of taxing high- income Canadians more. And a higher rate would effectively close a tax loophole available to Canadian small businesses that allows for the conversion of dividends into capital gains in a practice called “surplus stripping.”
https://www.investmentexecutive.com/new ... 20-budget/
History
The capital gains tax in Canada was implemented in 1972. The Royal Commission on Taxation, led by Kenneth Carter, had earlier recommended that since capital gains, gifts and bequests improved the welfare of the fortunate recipients, such gains must be taxed like income and wages. ‘A buck is a buck,’ the Commission famously argued.

As a result, changes were made to the Income Tax Act, and 50 per cent of all realized capital gains were included in taxable income. Over the years, the inclusion rate rose from 50 per cent to 66.66 per cent and then to 75 per cent, before being reduced back to 50 per cent, where it stands today.
https://financialpost.com/real-estate/t ... eal-estate
No need to type thank you; upvote=thanks.
Buffett, investors are focusing “not on what an asset will produce but rather on what the next fellow will pay for it.”

“Because gold is honest money it is disliked by dishonest men.” – R. Paul
Newbie
Sep 28, 2019
20 posts
9 upvotes
So, if I have a bunch of gains, but no losses, and my tax bracket is not affected, and if I believe 75% inclusion rate is coming, does it make sense to sell now when only 50% taxed? And yes, I realize I can't buy back in immediately same security without penalties
Member
May 4, 2010
260 posts
255 upvotes
Ottawa
Pstanley wrote: And yes, I realize I can't buy back in immediately same security without penalties
Why would you incur a penalty for immediately buying back a position that had a gain?
Deal Addict
Mar 3, 2018
3475 posts
3995 upvotes
GTA
Pstanley wrote: So, if I have a bunch of gains, but no losses, and my tax bracket is not affected, and if I believe 75% inclusion rate is coming, does it make sense to sell now when only 50% taxed? And yes, I realize I can't buy back in immediately same security without penalties
Yes you can do that if you are convinced 75% inclusion rate is coming. Previously the announcement date would also be the date of change so no one had a chance to sell in advance.

That said I don't think it is going to happen as it would deter investment. Also the government is borrowing at less then 1% for ten years right now. So the $300B debt this year adds less then $3B interest to ongoing current expenditures. A rounding error in the Federal budget.
Sr. Member
Oct 14, 2012
954 posts
728 upvotes
Woodstock
Personally I am betting on an increase in probate "fees" e.g. an increase in taxation of estates when someone dies. Very high "death duties" were brought in in Britain through the Great Wars; didn't penalize the low earners much but were very high for those with sizeable inheritances.

They do muck around with cap gains from time to time though. When I was young, you could utilize a "lifetime" cap gains exemption of $100 000. Then "poof" it was gone, long before I ever had any use for it.

Who knows! But it is nice to now be in a position where it matters.....
Deal Addict
User avatar
Oct 14, 2001
1754 posts
589 upvotes
GMA
In addition to estate tax, the other big pool of uncaptured tax dollars is with the capital gain exemption for the primary residence.

With a potential deficit of 400 billions, they're coming for more of your money. It's a matter of when and how, not of if.
Deal Addict
User avatar
Jan 28, 2012
1785 posts
693 upvotes
Thanh wrote: In addition to estate tax, the other big pool of uncaptured tax dollars is with the capital gain exemption for the primary residence.

With a potential deficit of 400 billions, they're coming for more of your money. It's a matter of when and how, not of if.
it's definitely coming. They already started tracking home purchases and sales on your taxes for this very reason. It started with cracking down on house flips and rentals being claimed as primary, but now that they have the information it's only a matter of time before they change the rules for primary residence all together.
Deal Addict
Dec 3, 2014
2348 posts
1840 upvotes
Ontario
Not sure why this discussion is being downvoted. This is an important topic and a worthy discussion. I have also heard that this is a real risk. In registered accounts it will not be a factor, but in unregistered avoiding turnover of stocks will be key. This further supports the structure that I am in the process of putting into effect, which is essentially US dividend paying stocks + VTI, some gold and bonds in RRSP, growth stocks + XAW in TFSA and Canadian dividend paying stocks in my unregistered.


There “should” be low turnover with the dividend stocks. An all in one ETF would also be a good call in unregistered as there would be little reason to sell and thereby trigger a capital gain.

My biggest concern with this is eventually my unregistered is likely to become large to the point that if it is only in Canadian dividend paying stocks that I will be overexposed to that asset, but I am not there yet for it to be a major concern.

Another issue may be changes to the dividend tax credit.

There will be many new tax changes in the years to come and those with money will be the targets. Things like capital gains, dividends and home equity are easy pickings for our big government.
Deal Addict
Dec 3, 2014
2348 posts
1840 upvotes
Ontario
BetCrooks wrote: Personally I am betting on an increase in probate "fees" e.g. an increase in taxation of estates when someone dies. Very high "death duties" were brought in in Britain through the Great Wars; didn't penalize the low earners much but were very high for those with sizeable inheritances.

They do muck around with cap gains from time to time though. When I was young, you could utilize a "lifetime" cap gains exemption of $100 000. Then "poof" it was gone, long before I ever had any use for it.

Who knows! But it is nice to now be in a position where it matters.....
Although I am no fan of taxes in any form, an estate tax is one of the “fairest” taxes as it is consistent with the goal of equality of opportunity - effectively forcing each generation to start on a more equal footing. The main issue with estate tax is there are many work arounds. The easiest amongst those is to simply gift one’s assets prior to death.

The tax that is the hardest to understand from an economic incentive standpoint is income tax. Why the government thinks we should dis-incentivize working is beyond me.
Deal Fanatic
Oct 7, 2007
9404 posts
5374 upvotes
Although I am no fan of taxes in any form, an estate tax is one of the “fairest” taxes as it is consistent with the goal of equality of opportunity - effectively forcing each generation to start on a more equal footing. The main issue with estate tax is there are many work arounds. The easiest amongst those is to simply gift one’s assets prior to death.

The tax that is the hardest to understand from an economic incentive standpoint is income tax. Why the government thinks we should dis-incentivize working is beyond me.
I am okay with income tax as long as it is not punitive because I agree that people should not be disincentivized to work but actually the opposite. People should be motivated to work and contribute to the country's GDP. People should also be motivated to start and run their own businesses and hire others so as to create even more opportunities for everyone to succeed.

The government always seems to want to tax based on their definition of "fairness" which seems to look at some people's hard work and/or risk taking and then call the results "lottery winnings" or "unfair" wealth. I personally don't think a tax policy that punishes people who work hard with punitive tax policies for the purposes of "transferring wealth" to those who don't work hard, don't work at all and/or don't work because they don't WANT to work is not going to result in a happy nor a productive society or a society with a decent standard of living.

And if the government truly feels this way, why are they so reluctant to tax lottery winnings which are truly the result of luck and not hard work? Is it FAIR that I win the lottery and you don't?
Newbie
Sep 28, 2019
20 posts
9 upvotes
"Why would you incur a penalty for immediately buying back a position that had a gain?"

You're right, I wouldn't. I was thinking of the situation where one sells with a loss.
Deal Fanatic
Jul 1, 2007
8569 posts
1763 upvotes
Speculation on this happening has been rampant since Trudeau's government was elected. Probably more likely to happen now with the massive deficits: raising cap gains inclusion is far more politically palatable than surtaxes or overall income tax increases or a hike to the GST (ie: back to 7%). Most of us of modest means have most of our non-RRSP investments in TFSAs anyway, and if you have excess it means you're either older or excessively wealth and not a Liberal voter anyway.

Whether they do this or not, it really makes deferring capital gains less of an imperative. If you have a gain on something, don't let the immediate capital gains tax (at 50% inclusion) sway you from selling it if it's prudent to do so.

In general, don't let tax dominate your investment strategy too much. They'll always change the rules.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Deal Fanatic
Nov 24, 2013
6479 posts
3344 upvotes
Kingston, ON
choclover wrote: I am okay with income tax as long as it is not punitive because I agree that people should not be disincentivized to work but actually the opposite. People should be motivated to work and contribute to the country's GDP. People should also be motivated to start and run their own businesses and hire others so as to create even more opportunities for everyone to succeed.

The government always seems to want to tax based on their definition of "fairness" which seems to look at some people's hard work and/or risk taking and then call the results "lottery winnings" or "unfair" wealth. I personally don't think a tax policy that punishes people who work hard with punitive tax policies for the purposes of "transferring wealth" to those who don't work hard, don't work at all and/or don't work because they don't WANT to work is not going to result in a happy nor a productive society or a society with a decent standard of living.
The irony of this post is that a CG inclusion rate of anything less than 100% already means Canadians pay less tax on income earned by sitting on their butt and not working than they do on income earned by working. There’s economic benefit to entrepreneurship to be sure, but we also have the Lifetime Capital Gains Exemption for that situation. The economic benefit to lower tax on ownership of publicly traded shares for someone who’s already maxed out their registered investments is comparatively lacking.

People have been rumouring this for nearly 5 years and the government hasn’t even really hinted at raising the inclusion rate. I suppose they could, but I still think it’s unfounded. I honestly don’t think they’ll raise taxes in any way until a recovery is well underway and rates start to rise. 2-3 years. CERB and CEWS and EI are creating a huge deficit for one year... not a permanent $300B annual structural deficit. Next year’s deficit could be a tenth of that unless major stimulus comes needed, in which case, again, they wouldn’t be hiking taxes.

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