That Budget was Taxing, Especially on Real Estate

Until now, 50% of all realized capital gains have been included when calculating your taxable income. 

That’s about to change.

Starting on June 25, the inclusion rate on realized capital gains exceeding $250,000 will jump from 50% to 67% for an individual. Money made on your primary residence or within a registered account like an RSP, RIF, RESP or TFSA will still be tax exempt.

The changes come just weeks after the Bank of Canada’s Senior Deputy Governor Carolyn Rogers called Canada’s lackluster productivity a “crisis”. Is now really the time to be raising taxes on people investing in productive assets?

We wouldn’t be surprised to see the policy reverse under a future government of either stripes. After all, only 56% of respondents from a recent Leger poll found this new idea to be a good one. The inclusion rate started at 50% in 1972 when capital gains were first introduced. Brian Mulroney’s PC Party then increased the inclusion rate to 67% in 1988 and then to 75% in 1990. But in 2000, Liberal Finance Minister Paul Martin cut the inclusion rate twice – first from 75% to 67% in February, and then to 50% in October – while trying to light a spark under business investment.

We expect this change to send a chill through anyone that already owns or wants to buy a second property.

Right now, the average Canadian home costs $730,000. At that price, it will take a 34% price appreciation before the 67% inclusion rate kicks in. Many that already own another property and have been thinking about selling will be in a mad rush to realize their capital gain before June 25 arrives.

A stock investor can much better manage their tax liability compared to a real estate investor. Rather than buy a second property for $730,000, a portfolio of this amount invested in 25 stocks would equate to almost $30,000 per stock. Not all 25 stocks will move in the same direction. Some will exceed expectations while others will disappoint. In a year when a stock investor has accumulated large realized capital gains, the portfolio can realize losses on the disappointments with the single click of a button (and no stagings, viewings, bank visits, moving trucks, phone calls to lawyers, or contracts). If you still like the stocks you’ve sold, you can always buy them back 31 days later to avoid the superficial loss rule while still claiming the realized loss.

Schneider & Pollock Wealth Management reviews everyone’s tax situation monthly. We discuss our tax planning strategy with the client long before December so that there are no surprises the following April when tax returns are filed with the Canada Revenue Agency. Each client is unique and accompanies a different tax situation.

While higher taxes will reduce business investment in Canada, we believe this policy may be reversed in the future. Until that happens, however, investors should utilize the publicly traded stock market instead of private real estate transactions to accumulate wealth.