With the upcoming federal budget, based on what I’m reading and hearing, it includes significant changes regarding the taxation of capital gains. It’s going up. I urge you to re-consider.
As you know, the Tax Free Savings Account (TFSA) offers Canadians a great way to save, invest and grow their money – tax free.
- The Tax Free Savings Account (TFSA) is a misnomer. Read why here. A TFSA can be much more than a cash savings account.
- The TFSA is an account, not a mutual fund.
- Contributions to your TFSA are not tax deductible, so you cannotuse contributions to reduce your taxable income.
- TFSAs are highly effective for every Canadian regardless of their tax bracket. You can read more about your rules in a post called TFSAs 101 here.
I believe using the TFSA is a smart thing to do, regardless of your income, to avoid future taxation. I use this blog to inform people to leverage this account to the extent possible.
The Registered Retirement Savings Plan (RRSP) is a great way to grow money tax-deferred.
- The RRSP is an account, not an investment itself.
- Contributions to an RRSP are tax deductible, so you can use these tax deductions to reduce your taxable income.
- Some Canadians shouldn’t use an RRSP (their income may not be high enough (yet) to reap the key benefits of this account).
- RRSPs are highly effective for Canadians who will be in a lower tax bracket in retirement versus their contribution years.
You can read more about the account you set up about 60 years ago here – in a post called RRSPs 101. I encourage Canadians to consider using this account on my when and where it makes sense for their financial well-being.
There are of course other accounts you have set-up, such as Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs) that depending upon the circumstance, are arguably more important that the registered plans I wrote about above.
However, if you have exhausted your registered accounts then you are largely left with a taxable account to invest in.
Doing so has been rather tax-efficient for the most part. You have offered diligent savers and investors who have maxed out their registered accounts a tax-friendly opportunity to keep investing. This includes use of the Canadian dividend tax credit. I admit though, maybe you were too generous prior to 1972.
You first introduced capital gains taxes in 1972. (Prior to that time, all capital gains were tax-free.) Since 1972, you have taken on numerous tax system changes – the taxation on capital gains included. There was a time in the mid-80s where you told each Canadian they did not have to pay any tax on capital gains up to a lifetime maximum of $100,000. That didn’t last though, although you have kept some healthy capital gains exemptions for small business corporation shares, farm property, and fishing property.
From 1972 to 1988, Canadians paid 50% tax on their capital gains. In the late 80s you increased the capital gains tax inclusion rate to 66.67%. In 1990, it was jacked up to 75%. In 2000, it got ping-ponged back to 66.67%. Now it’s a reasonable 50%. I often wonder what the cost involved is in constantly proposing, changing and updating yet again our convoluted tax system. I think it’s a beast.
I suspect billions of dollars could have been saved over time if the system was simplified.
Back to my point, increasing the taxation on capital gains (while increasing revenue for you) will punish savers and investors who have worked hard to save and invest beyond their registered accounts, in a taxable account. If you move ahead with this, I wonder what tax rules will apply next – and more costs to do so in the process. Are you going to put a lifetime cap on TFSA contributions? Maybe you’ll start taxing capital gains on our principle residences? I wouldn’t put anything past you. Without putting any new clamps on our housing market, you’ve essentially priced out a portion of Canada from owning a home in Toronto or Vancouver. Only the lucky paper millionaires who own their home in either city have been rewarded.
Raising the taxation on capital gains would be a clear signal you’re eager to heavily tax investment income. I believe this is not in the best interests of Canadians who are striving to take care of their own financial future. You are leaving us with fewer and fewer options to invest. It will mean you’re willing to put the some of financial burden back on you. That could be even more costly in the future.
What concerns do you have with our upcoming federal budget?