Group 3 - Capital Gains Inclusion Rate Flashcards
What is Capital Gains:
Its profit made from selling an asset it can be property or shares at a higher price than it was purchased
How are capital gains taxed? (Historically)
In Canada, historically only 50% of the gain was taxed
How are capital gains profit taxed now?
however due to recent changes that a larger portion of (66.7%) will now be subjected to tax depending on the indivudal:
Individual: Those who make above 250k, on their capital gains they will be taxed by 66.7%
For Corporations and Trusts: They will now face the 66.7% rate on all capital gains.
Why is it important to understand the new inclsuion rate as an individual or company?
This change increases tax obligations on investment gains, impacting individuals’ and corporations’ net earnings.
Investors might reconsider their investment strategies, and companies could see reduced profits after taxes, influencing their financial decisions.
What is the Lifetime Capital Gains Exception?
This is a tax benefit that allows individuals to exempt a portion of their capital gains from taxation when they sell specific assets (not real estate, bonds, stocks)
- the LCGE 971k but increased to 1.25 mil so an individual can claim this as tax-free capital gains from qualifying assets over their lifetime.
The point is to encourage entrepreneurship in society as it lets small owners claim higher tax-free gains and helps balance the tax burden that they carry.
What happens when the government takes higher capital gains (income tax revenue)?
If they take more capital gains or a larger portion there’s an increase in the governments tax revenue. (estimating at 20 billion dollars by the federal and parliamtary budget office by 17.4 billion) additionally in tax revenue in the next decade)
This helps the economy as it allows the government to help fund important things such as social programs and infrasture.
There is a downside as higher tax can discourage investors or businesses from making investment causing slow economic growth.
Explain the downside of higher capital gains taxes from an economic perspecitve?
Higher tax on capital gains can reduce the investment activity in society as when investments become more expensive, both corporations and individuals scale back on their investments (by 127 billion) causing slow economic growth:
Economic growth is fueled by investments so we can see the downside of a reduce production in job creation (414k), technological advancements and overall impact Canada’s growth as a whole such as the GDP (90 billion) and the real per capita gdp (decline by 3%)
How will it impact retail investors?
An increase in this rate is more capital gains are taxed and because of the many different types of investments it can impact these types of accounts and investments retail investors.
How does the increase in capital gains tax rate affect a TFSA or RRSP (tax sheltered account)
TFSAs (Tax-Free Savings Accounts): All growth and withdrawals are tax-free.
RRSPs (Registered Retirement Savings Plans): Growth is tax-deferred—you only pay tax when you withdraw the money, typically in retirement.
Impact of Higher Capital Gains Tax on TFSAs and RRSPs:
No impact! The increase in the capital gains tax does not affect investments within these accounts.
So what? TFSAs and RRSPs are now even more valuable, as they allow investors to avoid the impact of the higher capital gains tax.
How does this increase in tax affect non-registered (taxable accounts)
Non-registered accounts are regular investments without the tax advantage that the TFSA and the RRSP has. Without your investment in one of these you have to pay the capital gains tax whenever you sell an asset for a profit.
Impact of Higher Capital Gains Tax on Non-Registered Accounts:
Now, 66.7% of any capital gain will be added to your taxable income, instead of the current 50%.
This means higher taxes for any profits made on investments held in these accounts.
So what?
Retail investors holding assets in non-registered accounts will see a bigger tax hit when they sell, reducing their after-tax returns and potentially impacting their cash flow.
How does this increase in capital gains affect the the different types of investors? (Younger investors or older)?
Younger investors: These types of invetsors are more likely focused on grwth investments that they can hold for long erm and because of this, they might be less affected immediately if they keep their investments for many years, but eventually, they will pay more in taxes when they sell.
Older people:
about 53% of older people hold non-registered investments meaning they are more subjected to this tax and because of this there is less after-tax income they can use. This is bad because a lot of older individuals rely on these investments and because of this it might force older people to cut back on spending or go back into the labour force
How do we reduce the impact of the higher capital gains tax for retain investors?
They might adjust their stratiges in terms of their investment:
Shift to
Dividend-paying stocks as dividends are taxed lower than capital gains because of the dividend tax rate
Increase in the TFSA and RRSP as their investments are protected from capital gains tax
How does the increase in the tax rate on capital gains affect small businesses?
Entrepreneurial Disincentives
An increase in capital gains tax reduce the reward entrepreneurs get when they sell their business and because of this it discourages them from selling the business:
As fewer people are less likely to start a business because of the end result it creates fewer employment opportunties and less economic growth
Higher Tax Burdens on Business Owners:
- A lot of business owners rely on the income they get when they sell their business as a security for retirement. With the tax increase they might consider shifting their retirement savings to an RRSP in order to save for retirement better.
What are the two tax relief measures that company has to help combat the increase in capital gain?
LCGE (life time capital gains exemption) - allows investors to excluse a portion of their gains from tax when selling an incorporated business and becuse of this provides some tax relief and make it more appealing for business owners to sell their shares in an incorporated business.
New Canadian enterpreuneur incentive:
A new incentive offers a preferential tax rate of 33.33% on up to $2 million in lifetime capital gains, benefiting certain sectors like tech, farming, and fishing. This helps encourage entrepreneurship in key sectors by lowering the tax burden on capital gains. It helps promote growth in areas that are important for Canada’s economy.
How will this rate affect corporations?
1) Impact on equity financing:
Due to the increase in this tax corporations will find it harder to raise money through equity financing because when there’s an increase in taxes it makes investments less attraction. :
This can be shown through the ongoing IPO drought where fewer companies are going public.
If companies can’t raise funds through equity they may struggle to expand innovate which stunts job creation and economic growth.
2) It also causes a deterrance of insituitional investors
- Due to an increase in tax (capital gains) it deters large insituioal investors from investing in canadian companies which can affect the capital companies can acquire for them to grow and also comepte on a global scale.
3) Increase in reliance on debt for companies
- Due to the increase in taxes equity financing is becoming less attratcive and corporations are more reliant on debt financing to fund growth causing companies to be more financially vunerable as they would have to pay more interms of intrest reducing the profits and making it it harder for companies to grow. It also raises the company’s risk profile, making it less attractive to investors.
