Tax in the News: Trudeau’s Capital Gains Tax Hike: Misleading Claims and Real Consequences

In a recent video, Prime Minister Justin Trudeau announced a significant increase in capital gains taxes, touting it as a move that targets only the wealthiest Canadians and promises to generate $20 billion in new revenue. But is this really the full story? The truth is far more complex and troubling, especially for small business owners who have their life savings tied up in their businesses. Trudeau’s message not only misleads but also misses a crucial point: this tax hike will disproportionately impact those who have built their livelihoods from the ground up.

The New Capital Gains Tax: A Closer Look

Currently, when individuals and businesses sell capital assets, they pay taxes on 50% of the gain at their full marginal rate. Beginning June 25, the Trudeau government will increase this share to 66.7% for capital gains above $250,000. This means those with gains exceeding this amount will pay their full marginal rate on two-thirds of the gain.

Prime Minister Trudeau claims this change will affect only the “very richest” Canadians, those in the top 0.13% with an average income of $1.4 million a year. However, this assertion is misleading. Many small business owners, who are far from being the wealthiest, will be caught in this tax net.

The Impact on Small Business Owners

Small business owners often have their life savings tied up in their businesses. When they sell their business or assets within it, typically at retirement, this one-time event can significantly inflate their income for that year, pushing them into higher tax brackets. A plumber earning $90,000 annually who sells the goodwill in his business for $500,000 will see a substantial portion of this gain taxed at the higher rate. This scenario is not uncommon. According to a 2021 study by the Fraser Institute, 38.4% of those who paid capital gains taxes in Canada earned less than $100,000 annually, and 18.3% earned less than $50,000.

The Integration System: Now Disintegrated

Canada’s tax system is designed with a principle of integration to ensure that income earned by a corporation and subsequently distributed to its shareholders is not taxed more heavily than income earned directly by an individual. However, with the proposed changes, this integration principle is disrupted.

For example, if a small business owner sells their company, the capital gain realized within the company will now face a higher inclusion rate. This disrupts the balance that integration aims to achieve, leading to double taxation on the same income. As a result, small business owners will pay significantly more tax on the sale of their business, undermining their retirement savings and financial security.

Economic Ramifications: Discouraging Investment and Innovation

The economic research is clear: capital gains taxes are among the most economically damaging forms of taxation. They disincentivize investment and innovation, key drivers of economic growth. Increasing these taxes will deter investment in Canada, driving capital away when it is desperately needed. Business investment, crucial for enhancing living standards and boosting incomes, is already on the decline. This tax hike will only worsen an already precarious economic situation.

The Reality of Revenue Projections: The Lock-In Effect

Prime Minister Trudeau’s claim of generating $20 billion in new revenue is also questionable. Capital gains taxes are incurred when investors sell assets and realize gains. A higher tax rate encourages investors to hold onto their assets longer, anticipating a possible rate reduction with a future change in government. This “lock-in” effect can stifle economic activity, as investors delay sales to avoid higher taxes.

The government’s revenue projections likely assume a rush of sales before the new inclusion rate takes effect. However, without clear details on how the new rate will apply, this assumption may be overly optimistic. If the expected revenue does not materialize, Canada could face larger budget deficits and increased national debt.

Conclusion: A Call for Rethink and Reform

Prime Minister Trudeau’s recent announcement on capital gains tax increases is fraught with potential pitfalls that could harm a wide range of Canadians, particularly small business owners. The narrative that this policy targets only the wealthiest is misleading and fails to acknowledge the broader, more damaging economic implications.

As we navigate these changes, it is crucial for families with family-owned enterprises to stay informed and proactive in managing their tax strategies. At Shajani CPA, we are committed to guiding you through these challenges with expertise and dedication. Tell us your ambitions, and we will guide you there.

For further consultation and to stay updated on tax policy changes, contact Shajani CPA today. Let’s ensure your financial future remains secure and prosperous amidst evolving tax landscapes.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.

Trusts – Estate Planning – Tax Advisory – Tax Law – T2200 – T5108 – Audit Shield – Corporate Tax – Personal Tax – CRA – CPA Alberta – Russell Bedford – Income Tax – Family Owned Business – Alberta Business – Expenses – Audits – Reviews – Compilations – Mergers – Acquisitions – Cash Flow Management – QuickBooks – Ai Accounting – Automation – Startups – Litigation Support – International Tax – US Tax – Business Succession Planning – Business Purchase – Sale of Business