Tax and wealth-management professionals say the new Liberal minority government could consider raising the capital gains inclusion rate, should the feds find themselves in need of tax revenue to meet spending promises. Such a move by the Liberals may also represent a negotiating concession to secure support from the Opposition in order to pass legislation.
“Just because the Liberals didn’t campaign on [raising the capital gains inclusion rate], doesn’t mean that it’s not on the table,” says Jason Heath, managing director and certified financial planner with Objective Financial Partners Inc. in Markham, Ont., “particularly when tax dollars need to be raised from somewhere to reduce the deficit and pay for certain other promises.”
Says Ian Russell, president and CEO of the Investment Industry Association of Canada: “If push comes to shove in a minority government, where there is quid pro quo, where the NDP are prepared to support a high-tax, high-spend budget, the Liberals may be willing to sacrifice on capital gains [and raise the rate].”
While the Liberals did not address the capital gains rate in their election platform, the party did promise some generous tax cuts, including raising the basic personal exemption amount to $15,000 over four years.
That change, which Prime Minister Justin Trudeau signalled after the election would be one of his government’s first orders of business, would cost the government $2.9 billion in forgone revenue in 2020-21, and about $5.6 billion when fully implemented in 2023-24, according to estimates from the parliamentary budget office (PBO).
The NDP, to whom the Liberals may need to turn to for support, campaigned on increasing the capital gains inclusion rate to 75%, indicating in its platform that doing so would result in an extra $8 billion in tax revenue in 2020-21 alone, according to PBO estimates. Currently, only 50% of eligible capital gains are subject to taxes, making capital gains more tax-efficient than either dividends or interest income.
In recent years, tax practitioners have watched for signals indicating whether the Liberal government might increase the rate. “Every year, in anticipation of the budget, raising the capital gains inclusion rate is always in the top five predictions,” says Michelle Connolly, director of tax and estate planning with Sun Life Financial in Toronto.
Connolly suggests that the Liberals could propose limiting access to the capital gains inclusion rate to only those earning less than a certain threshold of income. Such a move would fit with the Liberals’ overall policy theme of the past four years – helping the middle class while asking high earners to pay more. “[The Liberals] are looking at a redistribution of wealth,” she says.
Says Heath: “The Liberals have definitely been proponents of taxing the rich, and wealthier Canadians are more inclined to have capital gains.”
Wilmot George, vice president of tax, retirement and estate planning with Toronto-based CI Investments Inc., says the government could be tempted to raise rates because of the ease of implementation relative to other tax revenue-raising initiatives.
“You make a simple change to the Income Tax Act, increase the inclusion rate from 50% to whatever you want – and there you have your increase,” George says.
If the Liberals were to decide to make such a move, George suggests, they would be highly unlikely to signal their desire to do so in advance. “That’s the type of announcement that would move markets,” he says.
Instead, the Liberals “would likely make this move in a budget,” George says, “and effective as of budget date, so that people don’t have the opportunity to do significant planning to avoid the increase in the capital gains inclusion rate.”
Clients convinced that a capital gains inclusion rate hike is imminent might consider triggering and crystallizing gains at the current rate, Heath says. However, doing so in anticipation of the mere chance of the government making a change is risky.
“You’re forcing taxes [now] that you wouldn’t have had to pay [until later],” Heath says.
If there is no increase in the rate, George says, “you’re left in a situation in which you’ve triggered a capital gain when you wouldn’t have done so otherwise.”
Too often, clients will put tax implications ahead of investment considerations, Heath suggests: “[Clients] hold on to, say, bank shares for 20 years, and they become a bigger and bigger portion of their portfolio. Sometimes triggering capital gains isn’t a bad thing when it’s done strategically, regardless of a potential capital gains inclusion rate increase.”
George says clients would be best advised in the weeks and months ahead to keep an eye on the emerging power dynamics of the new government in the House of Commons “to see how the parties are going to relate to [each] other going forward,” he says. These observations may provide an early indication of tax policy ahead of a budget. “I think we just have to give this a little time,” George says.
Russell hopes the government will introduce tax measures to encourage capital investment in small and medium-sized businesses. He anticipates that the Liberals will issue their fall economic statement in the coming weeks, outlining broad policy themes. After that, the government might issue a new call for submissions from interested parties in the run-up to the 2020 budget, a process that was delayed by the recent election campaign.