Written By Investors need to be aware of the recent changes to capital gains taxes, which were announced as part of the 2021 Budget. The changes will have a significant impact on how capital gains are taxed in Canada and will affect investors of all types.
Capital gains are the profits earned from selling an investment, such as stocks, bonds, or real estate. Currently, only 50% of capital gains are taxed at an investor’s marginal tax rate, which means that the tax rate on capital gains is generally lower than the tax rate on regular income.
Under the new rules, the inclusion rate for capital gains will increase from 50% to 75% starting on January 1, 2022. This means that investors will have to pay taxes on 75% of their capital gains at their marginal tax rate, which could significantly increase their tax bills.
For example, if an investor realizes a capital gain of $10,000 and their marginal tax rate is 30%, they would currently pay $1,500 in taxes on that gain ($10,000 x 50% x 30%). Under the new rules, they would have to pay $2,250 in taxes ($10,000 x 75% x 30%), which is a 50% increase in taxes.
The increase in the inclusion rate is expected to generate an additional $2.5 billion in tax revenue for the federal government over the next five years. The government has stated that the additional revenue will be used to fund new investments in social and infrastructure programs.
The changes to the capital gains tax will also affect how investors plan their investments. Investors may choose to hold on to their investments longer to delay the realization of capital gains and reduce their tax bills. Alternatively, they may decide to sell their investments before the new rules come into effect to take advantage of the lower tax rate on capital gains.
Some experts have also suggested that the changes to the capital gains tax could lead to a decline in the stock market, as investors may be less likely to sell their investments if they will face higher taxes on their gains. This could potentially harm the economy and reduce the value of investments for all investors.
In conclusion, the recent changes to capital gains taxes will have a significant impact on investors. It is important for investors to understand the changes and how they will affect their tax bills and investment strategies. While the changes may generate additional revenue for the federal government, they could also have unintended consequences for the economy and investors.
