The Upcoming 2021 Federal Budget & Potential Changes in Taxation

There have been significant changes to the Canadian economic landscape in the years since the 2019 Federal Budget was released. Most notably, the economic effects of the COVID-19 pandemic on the Canadian economy have been immense. The economic support programs introduced by the Federal government have been numerous and come with a significant cost.

Leading up to the 2021 Federal Budget, there has been speculation with regards to how the Federal government will, in effect, pay for the cost of the various economic support programs. Speculation has included changes to the capital gains inclusion rate, principal residence exemption, a wealth tax, and other measures.

The capital gains inclusion rate is the amount of capital gains that are considered taxable, and has been at 50% for the past 20 years. The taxable capital gain, being 50% of the capital gain, is taxed at a taxpayer’s marginal tax bracket according to their income level. For top earners in Ontario who are taxed at 53.53% on their incremental taxable income, capital gains are taxed at 26.765% (50% x 53.53%). There has been speculation that the 2021 Federal Budget will increase the capital gains inclusion rate to 75%. This would mean that an individual in the top marginal tax bracket in Ontario who would previously pay 26.675% on their capital gains would now pay 40.1475% (75% x 53.53%).

The principal residence exemption is, in brief, an exemption to the tax on capital gains which would otherwise result on the sale of an individual’s principal residence. In effect, the appreciation on an individual’s home is not taxed when the exemption is claimed. There is no maximum on this amount, although certain factors may prevent an individual from claiming the exemption. Speculation on changes to the principal residence exemption have included a limit to the exemption and a removal of the exemption.

A wealth tax is a complex and difficult endeavour for the Federal government to undertake. The concept of a wealth tax is not new, but then again, the definitions and legislation will require careful planning to avoid unintended consequences. Probate, an estate and administration tax, taxes the transfer of wealth from one generation to another and varies significantly among the provinces and territories of Canada. Probate may be considered a kind of wealth tax and may be changed by the various provincial budgets or the introduction of a federal estate and administration tax in the upcoming budget.

There are many different ways in which the upcoming 2021 Federal Budget may change taxation in Canada, and while we cannot know for certain what the changes will be until they are announced on April 19th, certain planning opportunities may be available to mitigate these changes.

If you would like our assistance in exploring potential planning opportunities for your specific tax situation, be sure to contact us.

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