With the 2017 federal budget just around the corner, the No. 1 question many of our clients who have enjoyed significant appreciation in their non-registered portfolios are asking is whether the government could increase the capital gains inclusion rate.

For non-registered assets, if you dispose of property (other than your principal residence) for a profit, only 50% of the capital gain is included in taxable income. This results in an effective tax rate on capital gains equal to 50% of your marginal tax rate on ordinary income. Depending on your province of residence, the marginal tax rate on capital gains for high-income earners in 2017 can be as high as 27%.

Although there was nothing in the Liberal Party’s 2015 pre-election platform to suggest an increase to the capital gains tax rate — nor has the government floated the idea publicly — such a measure shouldn’t be ruled out, especially in light of other recent tax changes aimed specifically at higher-income Canadians.

These include asking “the wealthiest 1% of Canadians to give a little more” via the introduction of the 33% high-income tax bracket for individuals earning more than $202,800 that helped pay for the middle-income tax cut.

Another change is the taxation of gains realized on switching among classes of mutual fund corporations, where, prior to 2017, investors could rebalance their portfolios within a mutual fund corporation on a tax-deferred basis. A change was also made to the taxation of linked notes, which are debt obligations issued by financial services institutions that provide a rate of return “linked” to the performance of one or more assets or indices over the term of that note. Starting in 2017, most gains realized on the sale of a linked note are being treated as interest income.

For a government that has focused on tax measures targeting higher-income Canadians, a hike in the inclusion rate would be consistent with that approach as the highest-income earners produce the vast majority of capital gains. Case in point: take the 2014 taxation year, in which 26.1 million personal tax returns were filed. Of those, less than 10% reported having any taxable capital gains at all.

When we dig deeper into who realized the $25 billion in aggregate taxable capital gains that year, we find that 74% of those gains were earned by those reporting income of more than $100,000 that year — or the top 8% of tax filers. Perhaps more revealing is that just more than half of the total dollar reported taxable gains earned in 2014 were realized by those making more than $250,000 annually, less than the top 1% of income earners.

So, for clients who fear an increase in the capital gains inclusion rate, what advice can we give them? Assuming that any increase in the inclusion rate to, say 66.7% or 75%, won’t be retroactive, should clients take steps to proactively realize any unrealized gains now, before any such increase takes effect? The short answer is no. If it didn’t make sense to sell an asset prior to a tax rate increase, the fear of such an increase shouldn’t change someone’s investment decision.

That being said, investors need to always be mindful of the “capital gains lock-in effect,” which is the tax disincentive to sell an asset that has appreciated significantly in value, even if it may make sense to do so from an investment perspective, especially if an alternate asset’s future prospects look better than the current holding. An increase in the inclusion rate could cause some investors to be even more likely to avoid rebalancing their portfolio for fear of a hefty tax bill, thereby increasing the lock-in effect.

The bottom line is that you need to remind your clients not to let the tax tail wag the investment dog.