The History of Capital Gains Tax in Canada
Joseph Alfie , CIM®
Helping the high-net-worth grow their wealth. Portfolio Manager, Myriad Private Wealth with iA Private Wealth inc.
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April 17, 2024
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The 2024 federal budget has been released, and it has sparked a vigorous debate about the implications of the changes to capital gains tax. I thought it would be beneficial to offer our network an overview of the history of the capital gains tax in Canada.
History
In 1972, Canada underwent a significant reform of its tax system, which included the implementation of the capital gains tax for the first time. This move was strategically aligned with the elimination of inheritance taxes, aiming to support the financial requirements of Canada’s social security system and to promote a fairer taxation framework.
Understanding Capital Gains
Capital gains are essentially the profits realized from the sale of an asset when the selling price exceeds the purchase price. For instance, purchasing 100 shares of a company at $90 each, totaling $9,000, and later selling them at $100 each would result in a $1,000 profit, which qualifies as a capital gain.
Exemptions and Special Cases
It's important to note that not all transactions trigger capital gains. Selling your primary residence at a profit or earning from investments in tax-advantaged accounts like RRSPs, RRIFs, or RESPs typically do not count as taxable capital gains.
Evolution of Capital Gains Tax in Canada
The introduction of capital gains tax was not unique to Canada; the U.S. adopted such a tax during the 1860s to support its Civil War efforts, and the UK in the 1960s to fund social security initiatives. From its inception in 1972 until 1988, Canada taxed 50% of capital gains at the individual's top marginal rate. This inclusion rate increased to 66.67% in 1988 and to 75% in 1990. This lasted about a decade and in February 2000, the rate was reduced down to two thirds, which lasted until October 2000, where it was dropped back to 50%, where it has remained to this day.
Federal Budget 2024
Budget 2024 announces the government's intention to increase the inclusion rate on capital gains realized annually above $250,000 by individuals and on all capital gains realized by corporations and trusts from one-half to two-thirds, by amending the Income Tax Act, effective June 25, 2024.
Temporary Relief Through Exemptions
The Canadian government also experimented with capital gains exemptions. In 1985, a one-time exemption allowed individuals to exclude up to $100,000 in capital gains from their taxable income throughout their lifetime. However, this exemption was discontinued in 1994, aligning with broader tax strategy adjustments.
This evolving landscape highlights the complexities and shifting paradigms of capital gains taxation, reflecting broader economic policies and market responses over the decades. As we look towards future reforms, understanding the historical context and current tax mechanisms is crucial for both investors and policymakers.
Source:
A primer on capital gains taxes in Canada | CBC News
Source:
Chapter 8: Tax Fairness for Every Generation | Budget 2024 (canada.ca)
Source:
The history of capital gains | Financial Post
This information has been prepared by Joseph Alfie who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.
