The federal government says its plan to increase taxes on capital gains is targeted at wealthy Canadians to achieve “tax equity.”
New sources of government revenue It is projected to raise $19.3 billion over the next five years by increasing the capital gains tax rate from 50 percent to 66 percent for individuals with annual capital gains of $250,000 or more.
What is capital gains tax?
Dr. Malik Shukayev, associate professor of economics at the University of Alberta, told CTV News that capital gains tax is a tax that individuals pay when they sell real estate, assets, bonds and stocks.
“Capital gains tax occurs when people buy investment property and sell it at a higher price. Therefore, the difference between the sale price and the purchase price is the capital gain,” Dr. Shukaev said. Ta.
When it comes to business, Shukaev says, the difference between the cost of setting up the business and the market price at which the business is sold is considered a capital gain.
If you buy a stock at one price and sell it at a much higher price, that is also considered a capital gain, Shukaev added.
What is the difference between income tax and capital gains?
He argues that while businesses and corporations pay taxes on their annual profits, it is not the same as capital gains tax. According to him, capital gains are the profits that companies and individuals make when they sell assets.
“When you buy a stock, it pays you a dividend. Dividends are not capital gains. That’s not it. It’s subject to various types of income tax and dividend tax,” Shukaev explained.
“That means the dividends, interest and income people receive from businesses are not part of capital gains.”
Who will be most affected by an increase in capital gains tax rates?
Shukayev said startups will be most affected, noting that these companies have less access to Canadian funding. He added that the lack of funds has made it difficult for local businesses to pay their employees adequately as they are “less established”.
“So in exchange for paying higher salaries, they promise to give stock to their employees,” he says. “And people are happy to do so because if the business is successful in the future, the value of the stock options they receive will increase.”
If the value of the stock increases, the employee must pay capital gains tax on the sale.
He noted that stock is very important because Canadian IT startups typically offer stock options to developers as part of their compensation packages, which puts them at a disadvantage when competing with their U.S. peers. did.
“For example, let’s say you start a company with an initial value of $1 million, and if it’s successful, it grows to $100 million in a few years. When you sell, the difference between the initial price and the sale price is a capital gain, and that amount is $99 million. dollars,” he explained.
He says business owners will be less motivated to set up companies because the higher their profits, the heavier the capital gains tax.
The changes include exemptions for entrepreneurs, including up to $2 million for a lifetime under the Canada Entrepreneur Incentive and an increase from $1 million to $1.25 million for the sale of small business, fishing and agricultural property under the lifetime capital gains exemption. It is. The government announced this on April 16th.
Will changes to capital gains tax lower the cost of living and create “fairness” for everyone?
Shukayev said the new policy would further increase inflation and the cost of living.
“For example, if you tax something more, labor costs will go up. So in this case, business taxes will just increase,” Shukaev said.
“I don’t see any scenario where that would actually lower inflation. I think it would be the other way around.”
Shukaev says that when it comes to rental properties, the supply will decrease as fewer people will consider buying a second property as an investment. He says it’s still too early to tell what the rental market will be like. He also said people who already own rental properties may be encouraged to sell before the changes take effect this summer.
And when it comes to productivity, it leaves Canada in a weaker position compared to other countries, which is bad for our economy, he says.
He added that innovation is a factor that has a negative impact on the economy and puts Canada’s economic development at risk.
He points out that young entrepreneurs and the younger generation will be hit hard by the new tax hike.
The Business Council of Canada also expressed concern about the capital gains measure in a statement after the budget was released on April 16, calling it “particularly concerning.”
With files from CTV News Windsor’s Ricardo Veneza and CTV New National’s Rachel Aiello
