Capital gains tax worth considering

David Bond is a retired economist who resides in sa国际传媒.

The taxation of capital gains has always been controversial. The recent federal budget has adopted several changes in this tax, including raising the percentage of the capital gain that will be taxed from now on.

The governmentsa国际传媒 aim is to increase total tax revenue. But a multitude of influential groups have protested. These include small businesses, physicians, start-ups paying employees with stock bonuses, and farmers passing their land holdings on to relatives.

There are some types of capital gains which are excluded from taxation of any sort. These include Registered Pension Plans, Registered Retirements Savings Plans and Tax Free Savings Accounts worth some $53.6 billion in 2023.

Then there is the total exemption for gains arising from the sale of personal residences at about $10.1 billion in 2023.聽 And, of course, winnings from the national lottery are also free of taxation.

If all of these items were treated for tax purposes as standard income, it is reasonable to assume overall taxes would decline for most people. This was the proposal made in 1965 by the last Royal Commission appointed to examine the tax system when it argued that a buck is a buck and should be treated the same no matter how it is earned.

If such a simple regime were implemented now, there might be opposition from influential segments of the electorate, particularly given that those who claim most of the capital gains for tax purposes include the highest income groups.

The issue is, however, more complicated.

Because we are a trading nation, if we institute taxes on capital gains that are radically different from such taxes in the U.S., we could see major structural shifts in our economy as high earners seek to transfer income to the U.S.. Thus, major reform would be avoided by most politicians.

There are, however, increasing calls for a comprehensive reform of the Canadian tax system to deal with rising provincial and municipal fiscal needs, demographic changes and inequities in the system. Even the leader of the Official Opposition, Pierre Poilievre, has indicated that, if he heads the government after the next general election, tax reform will be one of his priorities.

Perhaps one of the easiest actions would be the taxation of the capital gains associated with the sale of personal residences. Here is an example of how it could work.

As of a given date -- say July 1, 2026 -- all gains on personal residences up to that date would never be taxed. (That date coincides with the dates that municipalities conduct their annual assessments for local tax purposes.) A valuation date would, from then on, be set for all residences built to allow every purchaser a period to accumulate tax-free gains. Thus, a large part of the potential capital gain would be made permanently non-taxable for all home-owners.

The government could also determine a 鈥渘ominal rate of return鈥 between the date of the freezing of gains and a subsequent sale date that would be used to calculate an additional amount of the gain to be exempted. This rate would reflect the return from a financial investment (e.g. GICsa国际传媒) held for the same period.

Finally, gains above those two amounts would be subject to taxation at a rate fixed by government that would be made extremely hard to change.

Here is an example of how such a taxation regime could work for a property purchased in 2016 for $1.1 million. If the eventual sale price in 2029 is $2.4 million and the valuation in 2026 is $1.7 million, the total gain is $1.3 million. But, the gain up to 2026 is $600,000, which amount is excluded from taxable income permanently.

As to gains realized after 2026 (a further $700,000), the seller would claim an allowable gain based on the nominal rate of return in the years between 2026 and 2029. Letsa国际传媒 say that the allowable gain is determined in 2029 to be $450,000. Only the gain in excess of that amount ($250,000) would be taxed as capital gain in the year of sale.

Because of the number of home sales in any given year, the total revenue impact could be in the hundreds of millions.

That is an impressive number worth considering.