RISK: Liberals decide fate of capital gains tax

Investors can breathe a sigh of relief: the government didn’t change the capital gains rate in today’s federal budget.

In the weeks prior, many experts had speculated the government would increase the capital gains inclusion rate from 50 percent to 66.67 percent, or even as high as 75 percent.

Instead, it’s been kept at 50 percent.

“People who have made their plans on their investments based on the expectation of 50% can continue to expect that’s the way things are going to be treated,” says Doug Carroll, vice-president of Tax and Estate Planning at Invesco.

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Canada started taxing capital gains in 1972 at a 50 percent inclusion rate. That rate went up to 66.67 percent in 1988, and reached as high as 75 percent in the 1990s, before dropping back to 66.67 percent  and then 50 percent, both in 2000.

The government projects its 2016-2017 deficit will total $29.4 billion, declining to $14.3 billion in 2020. Additional tax revenue from a change to capital gains taxes would have brought tens of millions into federal coffers.

With that temptation, the government could raise the taxation rate in future years. “People have to be aware of that in their financial planning,” says Carroll.

Even so, clients shouldn’t worry about their retirements too much, he adds.

Clients who invest in non-registered accounts would be most affected by a change to the inclusion rate, since they have likely already maxed out their registered accounts.

“So, it shouldn’t hurt them from a paying-for-the-groceries perspective, but it’s those more discretionary things later on that they may have to go without,” says Carroll.

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If the Liberals decide to change capital gains taxes in the future, there are better ways to go about it than simply raising inclusion rates, say experts.

Kevin Stienstra, senior manager, Tax Services, Grant Thornton in Beamsville, Ont. told Advisor.ca that “a 50 percent inclusion rate encourages investors to take more risk with their accumulated capital, thereby growing the economy in the process.”

He suggested an alternative would be taxing capital gains similar to how they’re taxed in the U.S. – short-term gains (less than one year) are taxed as ordinary income, while long-term gains have about a 50 percent inclusion rate.

Carroll proposes a different approach. “Maybe the government would allow for people who were moving their investments, and re-investing in the same year, to carry over their adjusted cost base, so they would get that deferral,” he says.

“Given that they’ve taken action on mutual fund corporations, which allow that very thing, then I wouldn’t hold my breath.”

A version of this article first appeared on our sister site, Advisor.ca

This story was originally published by Canadian Insurance Top Broker.