The 2024 federal budget includes measures to combat the housing crisis, but the proposed change to capital gains taxation could encourage speculation. This budget proposes to tax capital gains more, which is a good idea, but the method used is not desirable.
The federal measure increases, for individuals, the capital gains inclusion rate from one-half (50%) to two-thirds (approximately 67%) for gains exceeding $250,000 over the course of a year. High-income taxpayers will pay more tax, which is what the government is aiming for. The capital gains of owners of plexes for more than 20 years risk exceeding $250,000 during the sale just because of inflation. There are a large number of them in Quebec and, for many of them, their plex represents a good part of their retirement capital.
Unfortunately, this federal measure does not take into account inflation and puts on an equal footing a gain on a property held for 2 years and another on a property held for 20 years! By not taking into account the shelf life of the asset, and therefore inflation, the government encourages people to keep their assets for a shorter period. In a real estate market that has speculative tendencies at times, is it really a good idea to encourage short-term investments?
The Quebec Tax Review Commission (Godbout Commission) proposed, in 2015, a different approach that would resolve this problem while increasing taxes on high incomes. It recommended “the elimination of the partial inclusion of capital gains and its replacement by taking into account the real capital gain, that is, the capital gain taking into account inflation. The capital gain would thus be taxed normally, like any other income”!
Finally, we can no longer cite the complexity of such a measure, because the widespread use of tax software would facilitate its application. Already, for fishermen, farmers and small business owners, the government is indexing the lifetime capital gains exemption to inflation.
Why did the federal government not choose the option proposed by the Godbout commission?