Deputy Prime Minister Chrystia Freeland speaks during a press conference at the Stationview YMCA Child Care Centre in St. Thomas, Ont., on May 13.Geoff Robins/The Canadian Press
Anderson Charters lives near Orillia, Ont. He has been an entrepreneur for more than 40 years.
The increase in the tax rate on capital gains in the recent federal budget has been widely deplored in many quarters. Deservedly so.
Commentators have pointed out how it will reduce the incentive to invest in the productive assets that Canada needs. Also, it will throw into question many decisions that middle-class Canadians have made over the years regarding their retirement planning via incorporation.
The new policy increases the portion of capital gains that are taxed to two-thirds from the current one-half. There’s an exemption only for individuals on gains below $250,000. And these middle-class Canadians who use incorporation to plan their retirement are not entitled to that exemption.
One might think that our Prime Minister and Finance Minister ended up regretting that they somehow lost sight of these facts when they came up with these changes.
But it appears that our leaders have no such regrets. On Sunday Finance Minister Chrystia Freeland said the broad strokes of its capital-gains tax inclusion hike won’t be changed. That was confirmed on Monday when the government tabled a motion laying out the specifics of the policy.
In a less-than-obvious manner, the wealthy and the middle class are both having their ox gored.
This is because the inclusion rate for all corporations, as well as for non-primary-residence real estate, rises to two-thirds after June 25 from 50 per cent for any capital gain, not just for gains above $250,000 annually.
The government frames this as targeting only the wealthy: Most people with annual capital gains of more than $250,000 have likely established holding companies (holdcos) and/or trusts to minimize taxes, if they haven’t moved their liquid assets offshore. These holdcos and trusts will now see their capital gains taxed at the higher rate from the first dollar of capital-gains income.
But similarly, the long list of Canadian professionals who have set up professional corporations using such legitimate tax planning strategies, often to save for retirement, will be facing the same increase in taxes. What’s the beef, you might ask. It goes beyond the fact that middle-class people are being lumped in with the wealthy.
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It’s also one of fairness, and not the fairness blather in the budget about the wealthy paying their fair share of taxes. What the Liberal government is doing is changing the rules mid-stream. Anyone in the past who used tax rules legitimately to minimize taxes (including this writer) will see this planning upended.
To be sure, any political party or government can decide that it doesn’t like holdcos or professional corporations. But if that’s the case, what would be fair as a matter of trust between a government and its citizens would be for our current Liberal government to announce that policy would not come into effect until a much later date, say Jan. 1, 2025. Even better, if less realistic, set these proposals aside and make them a policy plank in the next federal election campaign. As it stands, the new rules will be in place in just a few weeks.
If this is too much of climbdown for the government, here is another modest suggestion: set the same floor for corporations as it is proposing for individuals. Leave the capital-gains inclusion rate at 50 per cent for corporations for annual capital gains up to $250,000.
I subscribe fully to the notion that the rate of taxation on capital gains matters not a whit to the entrepreneur with the burning dream of starting her own business. But it does matter to Canada in the aggregate if the government leaves only 33 cents tax-free for every dollar of capital gains in the collective pockets of the country’s entrepreneurs rather than 50 cents.
Let’s remember that most new businesses are started with after-tax dollars. More importantly, let’s consider the dream factor, the emotions involved to leave a steady paycheque working for someone else and to take on the risk that one’s new business will not provide steady income. Then comes the heartache when after months or years the business fails, as do most startups, whether they are high-tech or Main Street.
As Canadians we have a choice. We can be a nation of dreamers, driven to build lives and communities by taking risks, or we can continue our slide toward less innovation, declining productivity and a lower standard of living.