If we had to create our tax system from scratch, what choices would we make as Canadians? Would we give the biggest tax breaks to those who earn the most money? Or would we insist that each of us pay our fair share to keep Canada strong?
I am convinced that the majority of us would choose the path of equity. This is how we do things in Canada. That’s why this week our government introduced changes that will ensure that a small number of wealthy Canadians will pay a little more tax when they sell a successful investment.
These revenues will in turn finance investments that will benefit all Canadians, particularly younger generations.
Financial responsibility
They will help fund our plan to build more homes, faster, so more young Canadians can realize their dream of homeownership. They will also allow us to create more daycare places, so that young parents do not have to choose between their career and their family. Finally, they will support the implementation of important new programs such as National Pharmacare, which will provide free diabetes medications and contraceptives, and the Canadian Dental Care Plan, which already helps two million Canadian women and Canadians across the country to go to the dentist.
Canada could go into debt to finance these crucial investments, but would be an unfair burden on younger generations. Fiscal responsibility is important, and it is in part because of our fiscally responsible approach that Canada was able to reduce interest rates last week – the first G7 country to do so.
As I walk you through the details of the upcoming tax reform, I first want to emphasize that the changes are aimed exclusively at investment profits known as “capital gains.”
When a person sells an investment that has appreciated in value – such as a stock portfolio or rental property – they realize a capital gain. In Canada, these gains are taxed at a lower rate than that which applies to income. Today, in fact, only half of these gains are taxed. This means that if someone makes $2 million in profit from a stock sale, they only pay tax on $1 million ($1 million is tax-free).
One consequence of this preferential treatment of capital gains is that many of the wealthiest Canadians earn most of their money through investments, not their income. We salute their success. However, because investment gains are taxed this way, wealthy Canadians may find themselves paying a lower overall tax rate than a nurse or carpenter.
Taxes
It is not fair. That’s why, starting June 25, wealthy Canadians will have to pay taxes on two-thirds of their capital gains, instead of just half.
Here are some important points about this change:
1. Canadians will still not pay tax on capital gains from the sale of their principal residence. The money you make from the sale of your home belongs to you.
2. The tax changes do not apply to the first $250,000 a person realizes in capital gains in a given year. The higher rate only applies to earnings above that $250,000 threshold. The majority of Canadians will still be able to sell successful investments without having to pay a higher rate. For example, a couple who own a rental apartment will not pay additional tax on the first $500,000 of profits made from a sale.
3. We are increasing the lifetime capital gains exemption for those who sell their small business or their farming and fishing property. Winnings of up to $1.25 million will now be tax-free.
4. To encourage innovation and job creation, we are introducing a new incentive for entrepreneurs, which will reduce the amount of tax they pay on capital gains and increase the lifetime exemption on sales of all or part of their business.
Brian Mulroney’s Conservative government increased the capital gains inclusion rate to 75% – a higher rate than the one we are proposing. This rate was 75% throughout the 1990s, a decade of strong economic growth.
Ultimately, we estimate that only 0.13% of Canadians – whose average income is $1.4 million – will be affected by this change in any given year, while millions more, especially young people, will benefit.
Today, there will be a vote in the House of Commons on our tax reform plan. It will be telling to see which parliamentarians, if any, vote against the principle of tax fairness for all Canadians, and in favor of a system that confers considerable advantages on those at the top of the heap. .
Chrystia Freeland
Deputy Prime Minister
Minister of Finance of Canada
