The federal budget unfairly targets higher-income earners, potentially stifling investment
The 2024 federal budget presented on April 16 is a disappointment and a missed opportunity.
Finance Minister Chrystia Freeland’s budget unfairly targets higher-income earners and businesses in a way that could curtail investment.
Meanwhile, a significant potential revenue source exists that the federal government could do more to tap: those who don’t pay the taxes that they legally owe.
$19 billion capital-gains tax hike
The budget introduces new spending of $52.9 billion over five years on affordable housing, pharmacare, the Canadian Armed Forces, artificial intelligence technology and other programs.
Where will all this money come from? one might ask. A large potion—$19.4 billion (including $6.9 billion this year)—is to be paid for by increases to capital gains taxes. In particular, the capital gains inclusion rate—the amount of capital gains subject to tax—is to be increased from one-half to two-thirds on capital gains that exceed $250,000 when realized on or after June 24, 2024, in personal taxable accounts.
For investments held in corporations and trusts, there is no $250,000 exemption; all capital gains will be taxed at two-thirds.
For employees who exercise stock options granted by their employer, there will be a one-third deduction of the taxable benefit above $250,000. For situations where the taxable benefit is up to a combined limit of $250,000 for both employee stock options and capital gains, taxpayers will still be entitled to a deduction of one half.
The 2024 budget includes another notable change that will affect investors and businesses. The budget proposes to increase the lifetime capital gains exemption from $1,016,836 to $1,250,000 on gains realized on the disposition of qualified small business corporation shares and farm or fishing property as of June 25, 2024.
“Precisely the wrong policy”
The federal government has said the capital-gains tax changes will affect just 0.13% of Canadians with an average gross income of $1.4 million. But we feel the changes are a disincentive to investment, may cause investors and business owners to sell assets, and could lead some Canadians to change estate planning.
In more extreme reactions, some ultra-wealthy Canadians may decide to emigrate from Canada and give up their tax residency. This would represent a huge opportunity cost of lost income-tax revenues to all levels of government.
In an editorial on the budget titled “The Liberals’ capital-gains tax hike punishes prosperity,” The Globe and Mail said, “The Liberals have gone to great pains to portray the capital-gains changes as a tax paid by the ultrawealthy… There is another basic principle of taxation policy: Whatever you tax, contracts. Higher tobacco taxes mean fewer cigarettes will be bought, for instance—a point Ms. Freeland’s budget makes in hiking excise taxes.
“What’s true for smokes is true for investment: increased capital-gains taxes will be a disincentive. Given Canada’s deepening productivity woes, it is precisely the wrong policy.”
Higher-income Canadians already pay fair share
We can only concur. As this blog noted last fall, higher-income Canadians already pay more than their fair share. The top 1% of income-earning families pay 22.5% of the contry’s personal income taxes, while the top 10% pay 54.4%, according to Statistics Canada data for 2021.
Not only is it unfair to raise taxes even more on higher-income earners, what’s especially galling is that the government has a large source of revenues it could pursue more intently instead: people and businesses that avoid paying taxes they legally owe.
In an eye-opening report, the Canada Revenue Agency has estimated it was missing out on up to $23.4 billion each year in taxes owed to the government, which it didn’t collect. This is over three times more than the $6.9 billion to be raised this year by the capital-gains tax changes.
The 2024 budget does propose new funds for the CRA to reduce call centre wait times. But the CRA would also benefit from increased funding for tax enforcement to crack down on tax evasion, which could help the government collect some of these missing billions.
This seems like a much more economically more sensible solution—not to mention a fairer one—than soaking law-abiding taxpayers and businesses even more.
We recommend consulting your financial and tax advisors to get clarity on how to optimize your situation under the proposed rules. In many cases, for example, it’s advisable to defer selling assets; if you realize gains now, you pay tax immediately and have less money after tax to reinvest.
That said, everyone’s situation is different. A good advisor can help you crunch the numbers to determine the best solution for you.
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Find more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.