Canada raises the capital gains inclusion rate from 50%, affecting secondary residences and investments
Changes to the capital gains inclusion rate have taken effect.
While some real estate experts express anxiety within the industry, the Canadian Real Estate Association (CREA) reports no significant increase in sales of secondary residences, as reported by CBC News.
The inclusion rate, or taxable percentage, rises from 50 to 66 per cent on capital gains above $250,000 per year for individuals, and on all capital gains realized by corporations and trusts. This affects profits from selling assets such as cottages, investment properties, stocks, or mutual funds.
The capital gains tax in Canada does not apply to primary residences.
People had over two months to sell their assets before the change took effect. Despite this, CREA spokesperson Pierre Leduc states, “We haven't noticed anything notable on the sales side at this time.”
He did observe a temporary increase in multi-family property listings following the budget announcement, speculating that many listings will be withdrawn after the deadline.
Mark Pedlar, a realtor in Grand Bend, Ontario, notes his clients' concerns about the change, but highlights other market factors affecting sales more significantly. “There was an increase in listing this year, but the capital gains increase was less of a factor,” he says.
Pedlar explains that interest rates, mortgage renewals, short-term rental regulations, and market trends have had a greater impact on inventory. He also points out that cottage owners wanting to pass down properties to family members are the most affected by the change.
“It's hard to part with a family cottage, so they will pay the tax down the road when it's time to sell,” he adds.
Christopher Alexander, president of Re/Max Canada, reports a flood of inquiries from consumers. He explains to CBC News, “Once people understood how much time and effort it would take to get their property sold and closed by the deadline, the math didn't make sense for most people.”
Finance Minister Chrystia Freeland argues that the changes target the wealthiest Canadians, estimating that only 0.13 per cent will pay more, raising $19 billion for social and housing programs aimed at the middle class. “The fair way to finance them is with tax fairness,” she states.
Freeland's changes also include a carve-out for entrepreneurs.
However, some economists, such as Jack Mintz from the University of Calgary, believe more Canadians will be affected than the government estimates. Mintz's analysis suggests that 1.25 million Canadians will be impacted, not the 40,000 projected by the government.
Lawyer Audrey DeMarsico observes a “rush to close transactions” on corporate deals that were already in progress when the changes were announced.
She notes that these changes affect various businesses, including real estate investment operations and advertising agencies, and that anyone in negotiations for ownership changes faced a sudden deadline.
Several economists and industry leaders report anecdotes about a spike in corporate restructuring activities before the changes took effect, although there is no data to confirm this.
Benjamin Bergen, president of the Council of Canadian Innovators, mentions receiving 1,800 inquiries about the changes and notes that some businesses are quietly moving abroad to avoid the tax increase. “People are not exiting in a ruckus. They're quietly just doing it,” he says.
Concerns about growth persist, with multiple industry groups claiming that the changes will discourage investment. Conservative Leader Pierre Poilievre opposes the change, calling it “job-killing.”
A spokesperson for the Office of the Leader of the Official Opposition criticizes the federal government for “hiking taxes on small business while Canadians' paycheques are shrinking.” Bergen warns that the changes will push capital and investment to the United States.
The federal government insists that the changes will not harm Canada's business competitiveness. They point out that corporations in most other countries, including the United States, pay corporate income tax on their capital gains.
An International Monetary Fund report on Canada states, “The increase in the capital gains inclusion rate improves the tax system's neutrality with respect to different forms of capital income and is likely to have no significant impact on investment or productivity growth.”
