Every year, Canadians for Tax Fairness advocates for fairer tax measures in the Federal Budget. This year marked the most significant win in a decade-long campaign to shut-down the capital gains tax loophole.
The 2024 Federal Budget released last week includes over $40 billion in new spending and investment over the next five years for critical investments in health, affordable housing, childcare, and more. $19 billion of that will be paid for by the richest Canadians through an increase in how much of their capital gains is included as taxable income. The move is a huge win for tax justice in Canada.
C4TF and its allies in labour, social justice and faith-based organizations have advocated for a decade to address the unfair tax break given to capital gains. Budget 2024 promises to increase the amount of capital gains included as taxable income from one-half to two-thirds on amounts over $250,000. The new rules work slightly differently for corporations and individuals.
Change to Corporate Capital Gains
Corporate capital gains will be taxed under the new inclusion rate of two-thirds. The move is expected to impact about 12% of corporations - the largest ones who are regularly selling holdings as part of their income; for example, real estate companies. The small business owners get a new tax break as part of the deal. Here’s how:
- The lifetime income tax exemption for gains made from selling a share in a small business, including family farms and medical practices, is increased to $1.25 million and will be indexed now to inflation.
- Once the lifetime exemption is used up, only one-third of the next $2 million in gains received through such a venture are considered taxable income.
- Under these new small business tax breaks, someone who sells their small business for a profit of $3.25 million or more walks away with $2.57 million, tax-free.
Changes to Individual Capital Gains
You have to be very rich in order to pay more tax under Canada’s new proposed capital gains rules, and that is the point. In fact, the government estimates that only 40,000 tax filers – those with an average income of $1.4 million, will be impacted by the new rules. Here’s why:
- Capital gains made from the sale of a principal residence remain exempt from income tax no matter the sale price.
- The first $250,000 of capital gains made annually will be assessed at the old inclusion rate of fifty percent. This means that those lucky enough to make $250,000 of their annual income or more through capital gains still walk away with $125,000, tax-free.
- Only annual capital gains over $250,000 will be assessed at the new inclusion rate of sixty-six percent.
These changes impact only the .1 percent of the population – the richest of us. Surely, they can afford to pay a little more towards things like affordable dental care, childcare and housing for everyone else.
Playing Catch Up with the US
Even with this new important measure, Canada’s tax system continues to fall behind the U.S. in terms of fairness. President Joe Biden’s proposed budget released weeks ago includes significant new measures to increase taxes on large corporations and very wealthy people. These measures build on tools adopted as part of the U.S.’s Inflation Reduction Act of 2022. Here is how Canada's current tax system and proposed budget matches up.
|
US Tax System and New Budget Proposals |
Canada Tax System and New Budget Proposals |
|
Increasing Taxes on Corporate Profits: |
|
|
The budget proposes to increase the corporate income tax rate from 21% to 28%. |
The federal corporate income tax rate remains at 15%. An additional 1.5% surtax applied on profits over $100 million for banking and life insurance companies as of 2022. |
|
The IRA brought in a minimum effective tax rate on billion dollar corporations of 15%. Dubbed the book profits tax, the budget proposes increasing it to 20%. |
Canada has drafted the Global Minimum Tax Act, aligned with the OECD’s plan, to set a minimum tax rate of 15% on large multinational corporations. There is no timeline for adoption. |
|
The budget seeks to increase the minimum tax rate on foreign earnings of large multinational corporations to 21%. |
Canada is still waiting for the OECD’s plan to reduce tax avoidance, which provides far less taxation of foreign earnings than the U.S. proposal. |
|
After years of debate, the budget will end all corporate tax deductions for executive compensation over $1 million. |
In Canada, all executive pay and bonuses are allowable deductions. |
|
The IRA included a stock buyback tax of 1%. The budget will increase that to 4% |
Canada’s stock buyback tax, first proposed in the 2023 budget, remains at 2%. |
|
Increasing Taxes on the Wealthy: |
|
|
The budget proposes a minimum effective tax rate of 25% on the ultra-wealthy. |
Budget 2023 raised the minimum effective tax rate for the wealthiest from 15% to 20.5%. |
|
The budget will restore the top marginal tax rate to 39.6% for single filers making over $400,000 a year and married couples making more than $450,000 per year. |
Canada’s top marginal tax rate is 33%. |
|
The Budget proposes to eliminate the capital gains tax break for households with income over $1 million. |
Two-thirds of annual capital gains over 250,000 have to be included as taxable income, the other third remains tax free. All gains from selling a principal residence are tax free. |
Other tax fairness elements in the budget
Automatic tax filing is moving ahead, albeit at a slow pace. New pilots of online and paper systems are expected to be launched this summer, along with stakeholder consultations. The current phone filing system, available upon invitation to some low-income filers, will be expanded to service 2 million people in 2025.
New financial transparency rules for cryptocurrency companies are promised in order to stymie tax avoidance schemes. Canada is acting in line with an OECD framework that seeks to have all countries sharing information about owners of crypto-assets as of 2027.
The Digital Services Tax is currently under consideration as part of Bill C-59. We are hopeful that it will continue to move through the necessary processes so that big tech finally pays its fair share.
While it is encouraging to see bold new measures, such as the increase in the capital gains inclusion rate, as part of Budget 2024, there is much more Canada needs to do to make our tax system fairer for all Canadians. C4TF will continue to advocate for an excess profits tax on large corporations, raising the corporate income tax rate, a wealth tax on the net wealth of the richest people, and other long-overdue policy changes to address income inequality in Canada.
Join the fight for tax justice in Canada and stay in the loop with all the latest tax fairness new here!
