Recent estimates from the Parliamentary Budget Officer suggest that about $226 billion in pandemic emergency aid will cause this year’s federal deficit to hit almost $329 billion. The provinces and territories have also ramped up support for citizens.
Tax increases sometimes follow deficit spending, as governments try to increase revenues by raising taxes. So, lots of taxpayers are wondering what tax increases could be coming.
Tax changes can be introduced at any time, but generally they happen as part of the federal budget. Budget 2020 was supposed to have been tabled on March 30, but with the lockdown that began a couple weeks prior, it was delayed. While it is possible there could be tax changes before next year’s spring budget, it may be more likely that a March 2021 budget could be the timing for any significant tax announcements.
It is important to note that when we speculate on tax changes, it really is just that— speculation. Some or all of these may never come to pass, let alone next spring. But here goes.…
Capital gains tax
For the past 20 years, capital gains in Canada have been 50% taxable. This is the income inclusion rate that generally applies to non-registered investments, cottages, rental properties and some businesses, among other assets, with half of a capital gain being tax-free. For the 2020 tax year, there is a $883,384 lifetime capital gains exemption on the sale of certain types of businesses, particularly qualified small business corporation shares and qualified farm and fishing properties.
In 2000, the inclusion rate for a capital gain was changed twice—from 75% to 66.66%, then to 50%, all in one year. Between 1984 and 1994, there was a $100,000 lifetime capital gains exemption that applied broadly to most capital assets. Prior to 1972, capital gains were not taxable in Canada.
In 2016, there was a lot of speculation prior to the budget that the Liberals were going to raise the capital gains inclusion rate. It never happened, but has been a lingering worry for some taxpayers over the past few years, and the current budget deficit has cast a spotlight on capital gains again.
If the capital gains inclusion rate were to increase, anyone selling a taxable investment like a stock, mutual fund, exchange-traded fund, cottage, rental property or business may have a higher tax bill to pay as a result. The thing with capital gains is that they are only taxable once realized and after a capital asset is sold. So, if someone speculated an inclusion rate increase was coming, and sold proactively to avoid a speculated tax increase, they may not only pay tax now that they do not need to pay, but if they are wrong about locking in a lower rate now, they may pay it for no reason at all.