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Amid concerns over 'collateral damage,' Trudeau, Freeland defend capital gains tax change

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Facing pushback from physicians and businesspeople over the coming increase to the capital gains inclusion rate, Prime Minister Justin Trudeau and his deputy Chrystia Freeland are standing by their plan to target Canada's highest earners.

In respective press conferences on Tuesday, both Trudeau and his finance minister defended their proposal to rake in $19.3 billion over the next five years by increasing the capital gains inclusion rate — the portion of capital gains on which tax is paid – for individuals with more than $250,000 in capital gains in a year.

This new revenue stream comes as the federal government plans to spend billions of dollars to increase Canada's housing supply and enhance social programs, with the Liberals framing the new revenue as helping to offset those investments in a way that's fair and doesn't offload a larger deficit on younger generations.

"At a time when young people have started to give up on the dream of eventually ever being able to own a home, it was really important to rebalance the situation," Trudeau said, speaking to reporters in Saskatchewan.

"I understand for some people this may cost more if they sell a cottage or a secondary residence. But, young people can't buy their primary residences yet."

What is the capital gains tax change?

As revealed in last week's federal budget, the capital gains inclusion rate will increase from 50 per cent to 67 per cent, and will also apply to all capital gains realized by corporations and trusts.

That means that as of June 25, people with more than $250,000 in profit made on the sale of assets in a year will have to pay taxes on a larger portion of that money.

This incoming amendment to the Income Tax Act is expected to affect the wealthiest 0.13 per cent, and approximately 12 per cent of Canada's corporations and Canadians with an average income of $1.42 million.

The inclusion rate for capital gains realized annually up to $250,000 is not changing, the existing capital gains exemption on primary residences will remain, and the lifetime exemption limit for small business shares, as well as farming and fishing properties is increasing.

What is the criticism?

While not the direct wealth tax or excess profit taxes some had anticipated – given Freeland's dodging of questions about whether those were revenue routes the government was considering – since the budget was tabled, many Canadian business owners and entrepreneurs have raised concerns that the move could stunt innovation.

"At a time when our country is facing critically low productivity and business investment our political leaders are failing our country's entrepreneurs," wrote Shopify president Harley Finkelstein in a post on "X" last week.

On Tuesday, the Canadian Medical Association (CMA) also came out against the move, asking the Liberals to reconsider as the change will impact doctors' retirement savings as most incorporate and operate their practice as a small business. 

"It is completely unfair, late in the game taxation for those physicians who did follow the rules of the day and save for their retirement inside of our professional corporations," CMA president Dr. Kathleen Ross said Tuesday. 

PBO cautions 'collateral damage'

It's this kind of potential for "collateral damage" that Canada's Parliamentary Budget Officer Yves Giroux voiced caution about in an interview on CTV News Channel's Power Play on Friday, with host Mike Le Couteur.

Citing the sale of secondary residences such as cottages, or rental properties in the current housing market as examples of how Canadians could feel the impact of this tax change, Giroux said it's not unusual for capital gains to be realized "well in excess of $250,000."

"The moment you have a capital gain that's higher than a quarter million, then you're captured by that higher capital gains inclusion rate," he said.

The PBO also cautioned that it's difficult to determine based on the government's current numbers, whether they will actually be able to generate the amount of revenue expected, but his office plans to assess that over the next couple of weeks.

What is the Liberals' rationale?

In defending the capital gains reforms, both Trudeau and Freeland said the way the tax system currently works means a nurse, student, or carpenter could be paying income tax at a higher marginal rate than a multimillionaire who can use accountants to pay a lower tax rate.

"That's not fair," Freeland said, speaking in Toronto on Tuesday. "It is fair to ask those who are doing really well to contribute a little bit more."

In the budget, the Liberals made a point of noting that this change will not impact 99.87 per cent of Canadians. Further, the 416-page document notes that in 2021, only around five per cent of Canadians under 30 had any capital gains at all.

And, next year, 28.5 million Canadians are not expected to have any capital gains income, while three million are expected to earn capital gains below the $250,000 annual threshold.

In an interview on CTV's Question Period with Vassy Kapelos that aired Sunday, Conservative deputy leader Melissa Lantsman would not say whether her party would reverse the increase in the capital gains inclusion rate.

With files from CTV News' Spencer Van Dyk 

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