From the Canada Emergency Response Benefit to the Canadian Emergency Wage Subsidy, the federal government is spending billions more than it planned to this year. What is not so obvious is that due to the economic downturn caused by COVID-19, is that the federal government will not bring in as much tax revenue than it planned to this year. What this all means is that the federal government’s deficit for this year, and likely for years to come, could be in the hundreds of billions of dollars. On July 8, 2020, Finance Minister Bill Morneau will present an Economic and Fiscal Snapshot of the state of the economy and will likely talk about the size of the expected current and future deficits.
Due to the amount of the expected current and future deficits, it is probably not unreasonable to expect that the federal government will be looking at ways to combat this. While there are other options available, tax increases may well be looked at. Tax increases can take many forms, the most obvious of which is to simply raise overall tax rates, and usually focused on high-income earners. Over the last few years, prior increases by both the federal and BC governments have raised the top marginal personal tax rate from 43.7% to 53.5%. This rate is applicable for earnings of over $220,000. Is there room for further increases to the top marginal (or other) tax rates? Probably, but there are other ways to effectively raise taxes without necessarily increasing tax rates.
One way that has been receiving a lot of attention is whether the capital gains inclusion rate will be increased. Currently, if a taxpayer realizes a capital gain, only 50% of that capital gain is included in income. If the inclusion rate is increased to 67% or 75% (both of which have occurred in the past), more of that capital gain will be included in income, and thus more taxes will be owing, without there necessarily being an increase to tax rates.
Who would this most impact? Anybody that is expected to realize a substantial capital gain in the near future, such as on a sale of a business, investment portfolio or real estate, could be subjected to more overall tax on their capital gain if the capital gains inclusion rate is increased.
Of course, there are other measures the federal government could take, such as increasing corporate tax rates, making part of the gain on the sale of a principal residence subject to tax, elimination of the capital gains deduction on a certain eligible property, or even increasing the goods and services tax. Speculation is rampant as to how the federal government will proceed, but no one knows for sure.
Are there things you can do to protect against any potential increased tax? Yes…but, of course, every situation is different.
If you are planning or anticipating a significant transaction before the end of the year, you should talk to your Rise Advisor to see if there are proactive steps that can be taken now to potentially mitigate the risk of higher taxes in the future.