Government Not Proceeding with Capital Gains Exemption Limitations

On October 16, the federal government announced its first concrete modification to the sweeping income tax changes that it had proposed on July 18.

The media has focussed on the phased reduction to the low income tax rate that applies to the first $500,000 of active business income earned by a Canadian-controlled private corporation.  The federal rate on such income will decline to 10% at the start of 2018 and to 9% at the start of 2019.  Tax rate cuts are always welcome, although they sometimes have the taint of bribing taxpayers with their own money.

The more significant change was the decision not to proceed with restrictions on capital gains exemption claims.  The capital gains exemption provides each Canadian resident with the opportunity to earn up to $1 million in tax-free capital gains on the sale of qualifying farm and fishing assets and just over $835,000 in tax-free capital gains on the shares of qualifying active business corporations.  On July 18, the government proposed numerous restrictions, including the following.

  • No capital gains exemption would be available for capital gains that accrue while eligible assets are held inside a trust.
  • No capital gain exemption would be claimable by an individual under the age of 18.
  • A capital gains exemption would be claimable only to the extent that an individual could be considered to have “earned” the exemption through actively working in the business in question.

The government now indicates that it will not be proceeding with these restrictions.  That is good news.

The government seems to be recognizing the difference between wages and investments.  Capital gains are, after all, an investment return.  If I purchase shares of Microsoft and the shares increase in value, I have made a good investment.  It does not matter that I have not personally contributed anything to that increase in value.  I may be completely computer-illiterate – it does not matter.  I benefit from that increase in value because I was astute enough to invest in a good business.

It is to be hoped that this recognition of the difference between wages and investments will continue to guide the government’s modifications to its July 18 income tax proposals.  We will have to wait and watch.

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