Contentious changes to how capital gains are taxed in Canada will bring in billions less in revenue for the government than Ottawa was expecting when it tabled the 2024 federal budget, according to the Parliamentary Budget Officer.
The PBO on Thursday tabled a probe of Liberal measures to hike the inclusion rate on capital gains taxes.
The fiscal watchdog expects that, over the five-year planning horizon in the budget, the government will yield an extra $17.4 billion in tax revenues thanks to the changes.
That’s below the $19.4 billion in revenues the Liberals had forecast in the budget in April.
The changes, which went into effect June 25, saw the inclusion rate on capital gains rise to two-thirds up from one-half for individuals making more than $250,000 annually, as well as for all gains realized by corporations and trusts.
Capital gains are realized from the sale of an asset like a stock or property. Canadians’ primary residences remain exempt from capital gains taxes when sold, but secondary properties like cottages are included.
The changes to capital gains taxes were billed as necessary to pay for spending elsewhere in the 2024 budget while bringing in enough revenue to maintain the Liberals’ fiscal anchors.
The so-called capital gains advantage has been cited as a way for wealthy Canadians to avoid paying as much on their income taxes. The Liberals said in the budget that only 0.13 per cent of Canadians earn more than $250,000 in capital gains each year.
But the changes were criticized by some business leaders and professional groups, arguing the changes would discourage business investment and affect tax planning strategies for groups like doctors.
Finance Minister and Deputy Prime Minister Chrystia Freeland defended changes to capital gains as part of the Liberal bid to improve “tax fairness,” arguing it was “really fair” to ask the wealthiest to pay more to fund investments in housing and other spending properties.
Signs businesses were quick to get ahead of changes
The PBO analysis noted that capital gains tend to be more “volatile” than other sources of income — they’re closely tied to market dynamics, economic cycles and changes in tax policy — and are therefore difficult to project.
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The response from businesses and Canadians to the announcement is also tough to gauge, the PBO noted, thanks to “uncertainty” surrounding the capital gains changes. There was no draft legislation tabled until June 10, the watchdog pointed out, and the question of whether the Liberals could effectively pass the measures in a minority government added to the confusion.
The capital gains issue became more contentious when the Liberals removed the measure from the budget legislation, forcing a separate vote on the issue in the House of Commons. The Conservatives voted against the measure, lambasting the Liberal approach to government taxes and spending, but it passed thanks to NDP support.
With a 10-week window between when the changes were announced and when the new higher inclusion rate would take effect, the PBO said it included projections for those who would realize capital gains ahead of the new date to take advantage of the old 50 per cent rates.
It projected that corporations in particular would rush to dispose of assets because all of their proceeds would fall under the higher inclusion rate after June 25, while individuals might take a longer horizon to stretch out their capital gains to skirt the annual $250,000 bar.
There are indeed signs that some businesses might have been rushing getting their affairs in order to beat the capital gains deadline, according to an analysis by commercial real estate firm Colliers Canada.
Sales of commercial real estate, which broadly covers office and industrial properties, surged to a decade-high for the month of June, the firm’s data showed.
The 156 transactions — typically multi-million-dollar deals —in June marked a 26 per cent jump from last year’s levels and accounted for more sales than January and February combined, according to Colliers data provided to Global News. Over the past two years, monthly sales have floated between a low of 52 and a high of 123, Colliers said.
Outside of June, it’s been a slow start to the year for commercial real estate, says Adam Jacobs, head of research at Colliers Canada.
Like some residential real estate markets in Canada, Jacobs tells Global News that high interest rates have sellers on the sidelines, waiting for conditions to improve for buyers so they can get the price they want for their asset.
But with the capital gains change announced in April, he believes the numbers might’ve shifted for many sellers. Rather than waiting and getting a better price when the market improves, some might’ve opted to take a cut on price so they’d pay less on capital gains taxes, Jacobs argues.
“I think there is probably some tie to the capital gains deadline,” he says. “Perhaps prices will be better, interest rates will be better, but taxes will also be higher. So let’s just take the bird in the hand here and close the deal now.”
The influx of sales in June isn’t necessarily a bad thing for the market, Jacobs notes, as it can help close the gap in price between buyers and sellers, giving all parties a clearer expectation of what properties are selling for these days.
Jacobs says that commercial real estate plays are typically longer term, with investors looking for returns over the course of a decade or more. But he also argues the suddenness of the change might’ve spooked some owners in the market.
“I think it gets people thinking, ‘Well if they change that, I mean maybe they’re going to change something else. Maybe these changes don’t seem to be going my way. Maybe this is just the time to sell, because there could be even more changes in terms of tax or withholding or something in the future,’” he says.
The Bank of Canada reported in its latest Business Outlook Survey in July that the “share of firms citing taxes and regulation as one of their top concerns increased sharply” in the second quarter of the year as the capital gains debate was playing out.
Global News asked Freeland at the time for a response to the sharp increase in businesses’ concerns.
A spokesperson for the finance minister said in an emailed statement that Canada’s marginal effective tax rate — a “tax competitiveness” metric that takes into account corporate taxes paid at all levels of government as well as incentives and deductions — is not affected by the higher capital gains inclusion rate changes and remains the lowest in the G7.
She also pointed to expanded exemptions to capital gains taxes such as an entrepreneurs’ incentive and lifetime exemptions on the sales of small businesses and farming and fishing properties as helping “to spur growth and productivity.”