Pandemic spending has budget watchers once again fretting about capital gains tax hikes

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The Biden proposal would effectively increase the tax on capital gains by treating them as ordinary income for taxpayers earning more than US$1 million. Combined with his plan to raise the top rate on ordinary income back up to 39.6 per cent (from 37 per cent), it would nearly double the current long-term capital gains tax rate to 43.4 per cent (39.6 per cent plus the 3.8 per cent NIIT) from 23.8 per cent (20 per cent  plus 3.8 per cent) for these high-income individuals. Biden, however, may not be able to get this tax increase through unless the Democrats can pull off a double victory and capture control of the U.S. Senate by winning the January runoff elections in Georgia.

So, what about Canada? Lest some readers accuse me of providing policy fodder for the tax man, Ottawa is well aware of its ability to tinker with the inclusion rate, as it has done so in the past. You’ll recall that prior to Jan. 1, 1972, Canada didn’t tax capital gains at all. Then came the Carter Commission Report, which recommended full taxation of capital gains. But the law, as originally introduced, only taxed 50 per cent of capital gains. Subsequent governments increased the inclusion rate to 66.67 per cent in 1988, then increased it again to 75 per cent in 1990. A decade later, it was dropped back down again to 66.67 per cent on Feb. 28, 2000, and then further reduced on Oct. 18, 2000 to 50 per cent, where it has remained until today.

In the government’s pre-budget consultations leading up to this year’s non-budget, the Standing Committee on Finance heard from nearly 70 organizations and individuals in Ottawa from Feb. 3 to 6, 2020, and received more than 270 briefs. In its final report issued earlier this year, the proposed recommendations on taxation included no increases to the personal income tax rates or the capital gains inclusion rates.

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