The frantic reaction to capital gains tax changes announced in the recent federal budget demonstrates how hard it is to agree on what wealth means.
The tax changes target capital gains of more than $250,000 per year, a threshold described in the recent federal budget as affecting just 0.13 per cent of tax filers and thus a concern only to, as the budget puts, “the wealthiest.”
But the new rules could affect people who do not see themselves as wealthy – owners of cottages that have been in the family for decades, for example. Or, people who saved hard to leave a legacy for the children when they die.
Exactly who is wealthy in Canada? Income data helps tell the story.
Statistics Canada just released an online tool called Income Explorer that uses 2021 census data to break down incomes according to age. Average incomes are shown for various age brackets – the peak is an average $73,800 in total income from age 45 to 59.
From there, average incomes declined gradually until reaching $46,080 for people 65 and older. This demographic offers its own lesson on tax reality and perception via the widely detested Old Age Security recovery tax, also known as the OAS clawback. The income level where the clawback started in 2021 was $79,845. With adjustments for inflation, the threshold for the 2024 income year is $90,997.
Another way to build an understanding of wealth is to look at income data gathered by Statistics Canada on the “1 per cent,” a term that has come to mean the financial elite. What becomes obvious in looking at the numbers is how much distance there is between high earners and everyone else.
The top 1 per cent income group in 2021 made $271,300 or more from all sources. To be in the top 10 per cent of earners for that year, you needed to make at least $106,700. My colleague Erica Alini looked recently at whether an income of $100,000 is enough for a comfortable life any more, and found the answer in some cities is not so much. Yet, $100,000 is still an elite income level when viewed against the entire population.
A revealing snapshot of wealth as defined by assets is the average value of tax-free savings accounts. “TFSA millionaires” are a hot topic online, but the most recent numbers reported by the Canada Revenue Agency show an average fair market value per individual of $26,614 for the 2020 contribution year. Total cumulative contribution room for TFSAs as of that year was $69,500.
The asset everyone cares about most is real estate, which looms large in the pushback against the government’s plan to tax two-thirds of a capital gain above $250,000 starting June 25. Below that level, the current 50 per cent inclusion rate for all capital gains would apply.
You can still sell your principal residence tax-free, thus perpetuating the all-time greatest Canadian personal income tax break. But decades of rising real estate prices mean capital gains on second properties, including family cottages, could be affected by the new inclusion rate.
People who see themselves as middle-class while owning a cottage or an investment property feel they’ve been mistaken for being wealthy. The recent federal budget invited this reaction by saying the average yearly gross income of taxpayers affected by the higher capital gains inclusion rate was $1.4-million. The budget documents said just 40,000 people qualify for this distinction, whereas 31.5 million tax-filers had capital gains ranging from zero to $250,000.
There are arguments that a higher capital gains tax discourages investment and entrepreneurialism, and they deserve attention at a time when Canada’s economic productivity is a concern. The more subtle problem with this tax change is that it collides with our ideas about real estate and wealth.
You are not wealthy just because you own real estate, but real estate is what defines wealth in the minds of many Canadians. Increasing taxes on their cottage or their second property is crossing the line.
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What’s the financial commitment of owning a cottage?
We want to hear from cottage owners, recent buyers, or potential buyers about the financial commitments of owning a second home. Are you a new Canadian embracing cottage culture? Did you purchase during the pandemic but are now facing financial challenges? Has remote work dynamics changed the game? Please share your experiences below, or reach out directly to Globe reporter Irene Galea at igalea@globeandmail.com.