Last updated: August 13 2019

Increase Capital Gains Rate? 90% of Pros Say It’s a Bad Idea

Will the current income inclusion rate of 50% for capital gains be increased to 75% after the next federal election? It’s an idea that’s been floated by at least one of the parties and a bad one at that, says the vast majority of KBR July poll respondents. Many are especially concerned about a lack of fairness, and a dire impact on the Canadian economy, and they had plenty to say about that.   

We tackled the subject of fairness last month in a report where we took a closer look at the math, and concluded that any change to the calculation of capital gains on assets should include an adjustment to the adjusted cost base to account for inflation over the holding period.

Responses from our readers also showed that this is a complex issue with some grey areas. About 10% agreed that the capital gains inclusion rate should be increased to 75% as some advocates have proposed. While others suggested it could be fair, but only with a different approach to the calculations. But the vast majority said no, and there were many comments. Here’s what our readers had to say:

First from those who left comments that fall into the “yes” or “maybe” categories:

Joe said, “Perhaps a higher rate for assets held less than 24 months. Otherwise, the risk involved in holding capital assets long term warrants a lower tax rate.”

Neil proposed a larger increase in stating “It should be 100%.”

Next, some of the comments from the majority who felt that the rate should remain the same, or be lowered:

David said, “I don’t agree with inheritance tax nor do I agree with capital gains.”

Robert pointed out how this is an approach that’s failed in the past: “Our society is increasingly penalizing those who work to subsidize the lifestyles of those who don’t or won’t. When you look at the historical consequences of this approach in the rest of the world you realize we’re on the wrong path.”

Alan agreed: “It didn’t work before. Why would now be any different?”

Gay commented on overall tax trends, “It (would be) nice to have the possibility of some income that is not taxed to the max - something to look forward to.”

Darlene said, “Absolutely NO! If anything, It should be reduced!”

David cited the impact on Canada’s economic strength: “NO. Canada is no longer attractive for investors. The capital gains rate helps to keep Canadian tax payers to invest locally. Just another cash grab proposal by the government.”

Aaron agreed, pointing out the likely result: “No. Unless they want to push more wealthy tax payers out of Canada.”

Ron shared similar concerns: “The only reason to do this would be to maximize short term tax revenues for the federal government. Long term would be disastrous to our economy as billions of dollars in investments would stop flowing into our already delicate economy.”

Dawson noted how this would complicate financial planning: “Inflation already makes it difficult to save for homes, retirement, etc. Governments need to find ways of doing things more effectively in every which way, including costs!”

Mitzi-Lynne mentioned that it would be unfair due to the risk taken to receive the capital gains: “No, no and no. The owner of the capital took the risk and supplied the capital to purchase the asset. They should get 100% of the gain. The government supplied no capital and took no risk, so how can they justify stealing tax on half the gain? Also, a capital loss is not treated the same. The capital gain goes into income, but the capital loss cannot be used against “other income”. It has to sit around until there are more capital gains from which it may be deducted. The inclusion rate should be zero.”

Terry mentioned that a higher rate would lead him to recommend different investment options to clients: “No. Why invest in the higher risk investments if taxation of capital gains approaches that of other income. I would advise to shift an investment profile to the safer side and accept more dividends instead.”

Nancy had concerns about the impact of one particular demographic: “I would say no due to the impact on seniors investments. As interest rates remain very low the only way to get a decent return is to invest in stocks. Seniors/retirees need this revenue.”

Pat added that an increased rate would have a significant impact on retirement planning: “The stock market is the only game in town for individuals who now need to provide their own retirement program. Defined pension plans are rare in the private sector and employees with a pension plan are now required to manage their own portfolio. Capital gains at 50% at least gives them a bit of a chance to increase their portfolios.”

William cautioned that it could result in a significant downturn: “Really people, the risk one takes to earn this is large…Remember 2008? 36% down in the TSX.
The result will be less investing in stocks, which in turn make it harder for companies to raise capital, and governments will collect less taxes as there will be fewer jobs in the Private sector.”

And, the final word goes to “CJP” with this insightful comment” “Why penalize someone so much for wanting to create wealth for them and their family? This type of action reduces the desire to be independent and creates more dependency on Government systems. If there were more incentives to create independent wealth it would make the entire country wealthier as well. Also, it has been proven by the “Laffer” curve that higher taxes does not increase tax revenue.”

Thank you to everyone who took the time to vote and add their comments to our July poll. This month we’re asking: “In your view, have recent federal tax changes contributed to economic resilience and powerful competition in Canada?” Vote on our August poll today!

Additional educational resources: The Fall CE Summits , coming to four Canadian cities this November 4-7 will help you navigate the complexities of capital gains and investment decisions. Enrol today to learn more about the theme: Year-End Tax Planning for Investors and Small Businesses live in-class.

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