^InsightsJustin Trudeau Resigns: What It Means for Canada’s Capital Gain Inclusion Rate

The recent resignation of Prime Minister Justin Trudeau has left Canada’s political and economic landscape in flux. Among the many uncertainties is the fate of the proposed increase to the capital gains inclusion rate—a measure that would significantly impact individual and corporate taxpayers. Below, we examine the potential outcomes of this political shakeup, how a change in government might affect the legislation, and the broader impact on investments.

The Proposed Capital Gains Inclusion Rate Change

The 2024 federal budget proposed increasing the capital gains inclusion rate from 50% to 66.67% for corporations, trusts, and individuals earning annual capital gains above $250,000. According to a report by Reuters¹, this change is expected to generate approximately C$20 billion over five years, funding critical initiatives such as affordable housing and healthcare.

However, Trudeau’s resignation and the prorogation of Parliament until March 2025 have left the proposal in limbo. As The Wall Street Journal² outlines, if Parliament does not pass the necessary legislation when it reconvenes, the inclusion rate could revert to its original level, leaving taxpayers uncertain about their financial strategies.

The Political Landscape: A Barrier to Legislative Passage

A change in leadership or governing party could significantly impact the proposal’s fate. Here’s why:

1. Shift in Priorities: A new prime minister or government might focus on different economic priorities, such as lowering taxes or fostering investment, potentially abandoning the proposed increase altogether. 
2. Opposition Influence: If an opposition party assumes control or gains influence, they may reverse or block the legislation. As reported by Reuters¹, critics view the tax increase as detrimental to economic growth and investor confidence, particularly for small businesses and startups. 
3. Public and Industry Backlash: The backlash from industry leaders and taxpayers adds pressure to reverse the proposal. Reuters¹ notes that many argue the higher inclusion rate could deter investment in innovation and economic growth. 

Potential for Reversal

Even if the legislation passes, a new government could move quickly to reverse it. Historical precedents show that governments often undo controversial policies enacted by their predecessors. Investment Executive³ emphasizes that such reversals could provide relief to taxpayers but also create uncertainty for long-term financial planning.

Impact on Investments

Increased Tax Burden

The proposed change would increase the taxable portion of capital gains, effectively raising the tax burden for high-income investors. For example, Canada’s Department of Finance⁴ explains that an investor realizing a $1,000,000 capital gain would report $666,700 as taxable income under the new rules, compared to $500,000 under the current rate.

Investor Behaviour

The uncertainty surrounding the inclusion rate has already influenced investor behaviour:

• Accelerated Transactions: As noted by Reuters¹, many investors have chosen to realize gains before the proposed rate increase takes effect, creating temporary spikes in market activity.
• Hesitancy to Invest: The potential for higher taxes on capital gains may discourage investment in growth-focused assets like stocks and real estate, particularly for high-net-worth individuals and corporations.

Economic Growth

Critics argue that the higher inclusion rate could slow economic growth by discouraging entrepreneurship and investment. According to Reuters¹, startups and small businesses, which rely on capital investment, may face reduced funding as investors shift toward less-taxed or lower-risk assets.

What Should Investors Do?

Given the uncertainty, investors should consider the following strategies:

1. Consult a Financial Advisor: Professional advice can help navigate tax implications and identify tax-efficient investment opportunities.
2. Diversify Portfolios: Spreading investments across asset classes can reduce exposure to changes in tax policy.
3. Plan for Long-Term Scenarios: While legislative changes can reverse quickly, a balanced, long-term approach ensures resilience in the face of uncertainty.

A Wait-and-See Approach

Justin Trudeau’s resignation has created a ripple effect of uncertainty, particularly concerning the proposed capital gains inclusion rate increase. With the possibility of legislative delays, reversals, or significant policy shifts under a new government, taxpayers and investors face a period of unpredictability. Staying informed, consulting experts, and planning for various scenarios will be crucial as Canada’s political and economic landscape continues to evolve.

At Verus Financial, we specialize in navigating complex economic landscapes and providing custom financial strategies tailored to your needs. Contact us today to ensure your portfolio is prepared for whatever changes lie ahead. 

Sources

1. Canada to Continue Collecting Capital Gains Tax Despite Parliament Suspension – Reuters
2. Canada Defends Capital Gains Tax Hike, Says It Will Keep Borrowing Low – Reuters
3. Canada Liberal Government to Bring Capital-Gains Tax Change to Vote – Wall Street Journal
4. Finance Confirms CRA Will Administer Capital Gains Tax Changes – Investment Executive
5. Capital Gains Inclusion Rate Update – Government of Canada