The equity markets have enjoyed substantial gains in the past eighteen months and significant accrued gains are sitting in investor stock market and mutual fund accounts. As well there are a number of individuals who have large potential gains on real estate holdings. Recent speculation throughout the financial services industry that the Liberal government is considering an increase in the amount taxed on the realization of capital gains will cause investors to consider the merits of selling holdings to avoid paying additional capital gains taxes on their investments.
Currently capital gains on non-registered investments are taxed at the rate of 50%. Given that these gains were taxed at 66.6% in the late 1980’s and later increased to 75% in the 1990’s there is no guarantee that the government won’t revert back to these tax rates. As well the current finance leaders have stated that they will look at all tax credits that benefit higher income earners. On the other hand the government has to consider that increasing these taxes makes Canada less attractive for investment and that economic development is hindered because there is less money in the system to reinvest in projects. Investors should also keep in mind that making this type of tax increase is palatable for the Minister of Finance as it is a way of generating more income without impacting the average Canadian.
There are also many right wing supporters who feel the tax should not be changed. In fact Conservative MP Maxime Bernier stated that the tax should be completely eliminated as he argues that a tax on investment will restrict future investment and development.
For many investors it might be a good time to take accrued gains even if the Finance department does nothing as both real estate values in this area and equity markets are at all-time highs. It is important though to look at the costs related to selling (real estate commissions, legal fees, broker fees) to determine if the disposal makes sense. One also has to consider the future use of the monies before divesting any assets as this may have an impact on the decision to sell.
The government is tight lipped on upcoming changes that impact the investment sector but it is worthwhile to keep in mind when making investment decisions that it can and will consistently develop new rulings. Again I recommend that it is prudent to discuss the merits of any investment decisions with your advisor. Enjoy your summer season!