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Budget 2017 – The Inclusion Rate for Capital Gains

Is it on its way up? Well…. we will know shortly. 

The federal government will announce the budget at 1 p.m. MST today. With many of our colleagues predicting that the inclusion rate is going up to at least 66.67%, people are actively planning to ensure the 50% inclusion rate is available to them.

In the ‘good old days’ there was no capital gains tax in Canada. In 1972, the capital gains tax was introduced. This change taxed 50% of a capital gain, which was further increased to 66.67% in 1988, and again increased to 75% in 1990. It then dropped to 66.67% in 2000 and further dropped to 50% by Paul Martin later that year.

While the popular prediction is an increase to the inclusion rate, here are some reasons why the government may choose to defer this decision:

  1. Canada is at the top end of taxing capital gains already. While increasing the capital gains inclusion rate may create some initial revenue to pay for large deficits, it could also mean capital leaving our country.
  2. The timing is not right. Increasing the inclusion rate at a time, when our American neighbours are talking about lowering tax rates, is just bad business.
  3. Our leaders have been courting foreign investors to come to Canada with their cash. Increasing how we tax capital gains will not make Canada attractive as people may consider investing in other lower tax jurisdictions.

What to do next?

Stay tuned for the 2017 budget brief. If rates go up, cashing in those capital gains at the 50% inclusion rate may be appealing to you. If you’re in a long term play, cash flow analysis should be done to examine prepaying capital gains tax now vs. deferring at a potentially higher rate. You also have to consider what our next government will do – whether they bring the rate down, increase it or maintain it – you need to position yourself intelligently.

If you are looking at having a large capital gain or would like us to assess how the budget will impact your business, please drop us a line:  //  587.320.3940

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