Canada to increase capital gains tax on firms and individuals

The federal government is raising capital gains taxes on wealthy individuals and companies to help fund billions in new spending on housing and other government priorities.

The federal budget, released Tuesday, increases the inclusion rate on some capital gains. Businesses will now pay income tax on two-thirds of their capital gains earnings, up from one half. The increase will also apply to individuals, but only on capital gains earnings over $250,000.

This change will take effect on June 25. Lawyers and accountants expect a rush of activity in the coming months, as affected individuals and businesses seek to sell assets and realize their capital gains before the new higher inclusion rate kicks in.

The tax measure is expected to generate $19.3 billion for the government over the next five years – $8.8 billion from individuals and $10.5 billion from companies – in an effort to offset roughly $53 billion in new spending. It is the largest revenue measure in the budget and the first change to capital gains taxes in 25 years.

Finance Minister Chrystia Freeland described the measure as an attempt to address "structural inequality" and raise funds from wealthy individuals that could be used to benefit middle-class and younger Canadians. The government estimates that the change will affect around 40,000 individuals and 307,000 companies.

However, economists caution that the tax change could discourage investment in Canada and further weaken the country's already-poor productivity growth.

"Perceptions matter," said Jimmy Jean, chief economist at Desjardins. "Many people will interpret this as the government discouraging business investment and not wanting wealthy and highly educated individuals to succeed."

On the corporate side, the change will primarily affect businesses that buy and sell assets, such as real estate investors or holding companies that invest in publicly traded securities or other businesses.

The budget also includes changes that will benefit some entrepreneurs. It increases the lifetime capital gains exemption – which allows small business owners to avoid paying tax on some capital gains when they sell their companies – to $1.25 million from $1 million.

Additionally, it introduces a new Canadian Entrepreneurs' Incentive that reduces the amount of tax some small business owners will have to pay when they sell their companies. Eligible individuals who found and run small private companies will be taxed on only one-third of their capital gains, up to a lifetime limit of $2 million. This will be phased in over 10 years, with entrepreneurs allowed to claim up to $200,000 in capital gains at the lower inclusion rate each year.

However, the new incentive will not apply to several industries, including restaurants, hotels, and professional services such as doctors' offices and small accounting firms.