OTTAWA — The Liberals’ latest budget proposes to increase taxes on capital gains such as profits on sales of shares, bonds, crypto or real estate. Many investors and tech entrepreneurs are furious, and the details are complicated. Here’s how it would work.
How big is the increase? Strictly speaking, tax rates are not rising. But starting at an annual threshold of $250,000, the percentage of a capital gain that gets counted as taxable income (the “inclusion rate”) is rising from half to two-thirds on June 25.
That means a higher percentage of capital gains will be counted as income for tax purposes, so some people and businesses will pay more dollars in taxes. The goal, as the budget says at length, is to produce a tax system that treats different kinds of income more equally.
In practical terms, the budget says that for someone in Ontario reporting $500,000 in earnings from paid work and $500,000 in capital gains, the marginal tax rate would rise from 26.8 per cent to 35.7 per cent. (The details vary across the country depending on provincial income tax rates.)
Someone in Ontario who makes $70,000 from paid work pays a marginal rate of 29.7 per cent.
The treatment of previous years’ capital losses won’t change. Those can still be used to offset later capital gains.
Does this apply to people’s homes? Principal residences are exempt from capital-gains taxes and the budget says that won’t change.
Long-term real-estate investments that are sold at a profit count as capital gains, including toward the new $250,000 threshold.
Gains from properties flipped less than a year after purchase will continue to be treated as business income, and fully taxed as such.
What about stock options? If you exercise a stock option, the difference between the strike price of the option and the market value of the share you use it to acquire counts toward the $250,000 threshold where the higher inclusion rate applies. In short: if you make a profit by exercising stock options, even if it’s only on paper, it’s treated like a capital gain.
Is there a distinction between investors and entrepreneurs? Yes. The budget proposes what it calls “the Canadian Entrepreneurs’ Incentive,” which will exempt two-thirds of an entrepreneur’s capital gains from selling a business, up to a maximum of $2 million. That is, they’ll pay tax on just a third of the capital gains, less than the current one-half.
There are many catches. To qualify, the person will have to be a founding investor; the owner of at least 10 per cent of the shares; and principally employed in the business for at least five years before the sale. One-person professional corporations (such as doctors or accountants) wouldn’t qualify and whole fields of business are excluded, including finance, insurance, real estate and the arts.
The exemption would be zero in 2024 and increase by $200,000 a year until reaching the $2-million maximum in 2034. It’s also a lifetime maximum for individuals, so someone who builds a very successful company and makes $50 million selling it in 2036 would get the same benefit as someone who sells four companies and makes $500,000 each time.
How many people are affected? The government estimates that 40,000 people will have capital gains over $250,000 in 2025. The change also applies to businesses, though the budget doesn’t make a similar projection for them.
The budget says it will mean $19.4 billion in additional federal revenue—and therefore $19.4 billion less for individuals and businesses to save, spend and invest—over the next five years. The break for entrepreneurs is estimated to cost $1.7 billion over the same period.