Canada capital gain taxes may increase, so what?

[samwise]

There is speculation that the tax inclusion rate will go from 50% to 75%. (Note for non Canadians below).

 

Some people have suggested that capital gains can be booked soon to pay the lower rate. Garth Turner had this in his blog in the last few days.

 

Anyone thought about this? Personally I haven’t changed anything yet.

 

Note: this means that earlier we paid 0.5(marginal tax rate) on capital gains. In the future this could become 0.75(marginal tax rate).

[scorpioncapital]

This tax increase will raise very little revenue at all. Almost useless. Furthermore half the countries in Europe have zero capital gains tax at all. And there are many countries competing for capital. Capital flight is a very real thing.

But I'm not sure the analysis is correct. If tax goes up, people will hold stocks longer (except for a mad rush to sell before) and thus stocks will go up. If the tax goes down, then people will sell more frequently, possibly leading to a lower level of the stock market.

 

[SharperDingaan]

The maximum federal MTR for an individual taxpayer with taxable income > $214,000 is 33%. Add an additional 13.16% if you live in Ontario, to total 46.16% (33% + 13.16%). The current MAXIMUM capital gains tax is 50% of the gain x the individuals MTR, or 23.08% - quite a bit less than the 50% stated. At 75%, it would rise to a MAXIMUM 34.62% - and this is after you have done everything possible to lower your taxable income as much as possible (RRSP, interest/investment expenses/losses,etc.).

https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html

 

If you earn > $214,000 taxable income/yr, you are in the top 1% of income earners in Canada. You can afford it.

https://www.thekickassentrepreneur.com/top-one-percent-of-wealth-for-canadians/

 

To the tax consultant, you should liquidate your entire portfolio by Nov-30, and buy it back > 30-days later to avoid triggering wash-trade rules. The tax saving on a net unrealized gain of 10%, is AT MOST, 1.2% (10%x (.75-.50) x .4816), and highly likely to attract a audit. For every 5K of defence cost you need 416K of net gain just to break-even. Feeling lucky?

 

SD

 

 

 

 

 

[Rod]

Maybe a more useful consideration is to be careful owning companies that are carrying very large amounts of unrealized gains on their balance sheets. If the cap gains rate goes up so will the magnitude of that liability. Holding companies could be affected by this.

[wabuffo]

Add an additional 13.16% if you live in Ontario, to total 46.16%.

 

You forgot to add the Ontario surtax (which basically adds 56% more Ontario income tax to the top rate - ie, .1316 x 1.56 = .2053).  Combined federal and Ontario top marginal tax rate = 53.53% in 2020.  So top capital gain tax rate = 26.76%. 

 

If inclusion rate goes to 75% (and using 2020 tax rates), then top capital gains tax rate = 40.14% and not 34.62%.

 

wabuffo

[KCLarkin]

There is speculation that the tax inclusion rate will go from 50% to 75%. (Note for non Canadians below).

 

Do you have a source? There seems to be speculation every time the liberals begin budgeting. It might be more credible given the financial situation, but I'd want a strong source before making any financial decisions.

 

Nothing against Turner, but that looks like pure speculation based on his opinion of the liberals.

 

Disclaimer: I've been burned by this before. Triggered some capital gains the last time these rumours made the rounds.

[wabuffo]

Nothing against Turner, but that looks like pure speculation based on his opinion of the liberals.

 

It looks like nothing is imminent for this budget in October.  Trudeau said so himself - do you believe him?

 

https://www.theglobeandmail.com/opinion/editorials/article-justin-trudeau-has-put-erin-otoole-in-a-bind-can-the-new/

"He [PM Trudeau] also said his government would not raise taxes during the recovery, which means any new spending next year will be paid for with new debt."

 

Beyond 2020-21, who knows. 

 

wabuffo

 

[Viking]

There is one likely outcome of free money (zero or even negative interest rate policy of all central banks) and that is asset bubbles.

- housing bubble

- stock bubble

 

This will benefit people who are already wealthy (people who own a house and who also own stocks).

 

People who do not own a house and/or who also do not own stocks will not benefit.

 

So over time the wealth gap between these two groups, which is already large, will balloon.

 

Here in Canada it would not surprise me to see the government increase taxes on stock gains. Taxing real estate gains on primary residence will also likely get some attention (this would be tough to do politically). Not this year. But perhaps in a year or two down the road as the brutal reality of the terrible fiscal realities start to sink in. Someone is going to have to pay for all the deficit spending they are currently doing (with more to come in September).

[LC]

There is one likely outcome of free money (zero or even negative interest rate policy of all central banks) and that is asset bubbles.

- housing bubble

- stock bubble

 

This will benefit people who are already wealthy (people who own a house and who also own stocks).

 

 

Welcome to the last decade  ;D

[Gregmal]

There is one likely outcome of free money (zero or even negative interest rate policy of all central banks) and that is asset bubbles.

- housing bubble

- stock bubble

 

This will benefit people who are already wealthy (people who own a house and who also own stocks).

 

People who do not own a house and/or who also do not own stocks will not benefit.

 

So over time the wealth gap between these two groups, which is already large, will balloon.

 

Here in Canada it would not surprise me to see the government increase taxes on stock gains. Taxing real estate gains on primary residence will also likely get some attention (this would be tough to do politically). Not this year. But perhaps in a year or two down the road as the brutal reality of the terrible fiscal realities start to sink in. Someone is going to have to pay for all the deficit spending they are currently doing (with more to come in September).

 

Something like this, loose and lazily thinking, such as higher tax rates for larger $ volumes of capital gains, would make sense to me. First $25k 0%, next $75k 10%, $100k-500k at 20%, etc.

[KCLarkin]

This is from 2017:

https://www.theglobeandmail.com/globe-investor/personal-finance/taxes/how-to-plan-for-potential-change-to-capital-gains-taxes/article34258737/

 

I would at least wait to see this making headlines in the Globe before worrying about it. I don't see it happening now with a minority government. But I've been wrong before.

[Rod]

This is from 2017:

https://www.theglobeandmail.com/globe-investor/personal-finance/taxes/how-to-plan-for-potential-change-to-capital-gains-taxes/article34258737/

 

I would at least wait to see this making headlines in the Globe before worrying about it. I don't see it happening now with a minority government. But I've been wrong before.

 

I can see it happening. The obvious way to raise the necessary money would be increasing the GST from 5% back to 7%. But to keep the NDP on side the gov’t would likely need to hit the wealthy even if the amount of tax money raised is not all that high. The NDP is keen on wealth taxes and raising the capital gains rate. I could easily see an increase of the inclusion rate to 75% as a way of gaining NDP support and optically demonstrating a hit to richer people while a GST increase does most of the work.

[samwise]

Thanks all!

 

I agree that this is a speculative risk currently.

 

SD, yes let’s all pay our taxes and not be too close to the line. Wabuffo did update your maths a bit. Ontario marginal tax rates: https://www.taxtips.ca/taxrates/on.htm

 

So it’s a 13% impact on embedded capital gains. I wouldn’t change my behaviour except marginally on stocks I intended to sell anyway. For those stocks I already intend to sell, there may be a role for “reverse tax loss selling “, I.e book gains now and losses later at a higher tax rate. Of course this comes with risk: market risk on the stocks held a couple of months longer, risk that the tax doesn’t rise, cash flow problems since you pay taxes this year, but get a refund next year. If the gains and losses cancel out, then one can think of this cashflow as an investment this year, with a 13% return next year. Not shabby for a guaranteed return (if those stocks didn’t move much and the tax did rise). If you have much more gains then the choice is pay now at a lower rate, or pay later at a higher rate. So is the time value of money more than 13% for you?

 

Thanks for the links showing this may not happen wabuffo and KCLarkin. Appreciate the links. Reinforces my inclination to do nothing yet.

[SharperDingaan]

With something like this it's probably fine if it's just timing of a once/done terminal event.

But if you buy back pretty much the same position, not long after the wash-trade deadline expires .....

 

SD

 

 

[scorpioncapital]

Amazing, Trump is talking about lowering capital gains tax and several developed European countries have no capital tax at all while Canada is talking of increasing it? I would suggest this means many decades of failure relative to other economies. We should ask why the failure occurred that may require such desperate measures.

 

 

 

 

[Mark Jr.]

There is one likely outcome of free money (zero or even negative interest rate policy of all central banks) and that is asset bubbles.

- housing bubble

- stock bubble

 

This will benefit people who are already wealthy (people who own a house and who also own stocks).

 

 

Welcome to the last decade  ;D

 

It’s called The Cantillon Effect

https://outofthecave.io/articles/wait-why-is-the-fed-buying-my-biggest-competitors-bonds/

 

[DooDiligence]

There is one likely outcome of free money (zero or even negative interest rate policy of all central banks) and that is asset bubbles.

- housing bubble

- stock bubble

 

This will benefit people who are already wealthy (people who own a house and who also own stocks).

 

 

Welcome to the last decade  ;D

 

It’s called The Cantillon Effect

https://outofthecave.io/articles/wait-why-is-the-fed-buying-my-biggest-competitors-bonds/

 

What's the difference between Democratic socialism & Republican autocracy?

In one, the people wear the boots & in the other, the politicians wear the boots.

Either way, somebody gets trampled.

 

I like / am terrified by your website.