quote:

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Canada has had a capital gains tax since the early 1970s, but the federal government has steadily increased the rate and gradually removed exemptions for most transactions. The tax rate on capital gains is 75 per cent. That means if someone makes $100,000 on a piece of land, the sale of a stock or a business, $75,000 is considered taxable income.

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The above is technically true, but is totally misleading. First of all, the tax system does not impose a 75% tax rate on capital gains, it imposes a 75% inclusion on capital gains. That $75k is then subject to the marginal tax rates applied to normal income, so the real tax on that $75k is more like about $20k.

quote:

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Smith - not his real name, although the situation is true -is sitting on a million-dollar hot potato. Should he die and leave the land to his baby boomer kids, they would quickly have to come up with $300,000 to $400,000 to pay the capital gains taxes.

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*coughbullshitcough*

There's a $500k lifetime exemption on capital gains and in-family inheritances can be exempted in a variety of manners.

This asshat is trying to tap into peoples' vain hopes about the pot of gold at the end of granddaddy's rainbow, never mind that grandpa's illness will probably wipe out half his assets and get rid of the capital gains triggering problem anyway.

The inclusion rate began at 50% and then was raised by(of all people) the Mulroney government first to 66%, then to 75% as part of the deal to stifle dissent and outright disgust to their lowering of the marginal tax rates(with the chief benefit going to those with higher income, of course) and reducing the number of marginal levels from 10 to 3 on the patently fraudulent excuse that it somehow “simplified” the tax system. The real function(or at least the real effect) was to put the upper middle income types in the same basket with the really rich re marginal rates, strengthening political support for reducing taxes on those really rich. The announced goal was to eventually get the inclusion rate up to 100%(so the Carter Commission goal of a buck being a buck would finally be realized wrt cap gains). On attaining office the Chretien government froze the inclusion rate and the rolled it back to 50%, which is where it sits now. In Dr C’s example the tax is on $50K not $75K, so it would be in the neighbourhood of $14K not $20K

Capital Gains is a slightly more complicated problem than it might appear at first glance.. If you earn some money and use it immediately to consume something, then you get full value for that money, but if you sit on it, you can buy less and less because the value is eaten away by inflation. But our economic progress depends, to a great extent, on people saving some money and investing it in the generation of capital goods(plant, equipment) and other long-term assets(research, education). So it’s only fair to say to someone that if they invest their money the real(adjusted for inflation) value of their capital will remain intact, while any income it generates will be taxed at the rate everyone else pays

But a capital investment can be made and cashed in shortly or it can be left for a long time, the problem being analogous to the Tobin Tax/ international investment one. In the same way in general longer is better than shorter for investments.

Capital gains are different than earned income, but their difference lies in the amount of time they are available to build up capital(their public policy purpose and the legitimate concern of tax policy), so while it is reasonable to reduce the inclusion rate for a capital gain, it should not be reduced by some set, predetermined figure, but rather in order to retain its real value, that is by the rate of inflation.

The easiest way to calculate this for tax purposes would be to calculate the capital gain on a holding when it is disposed of(as is done now) but rather than to just include 50% as income, to include a portion depending on how long it had been sold and the inflation during that period. For instance, if there was a security that you held for one year and during that time there was a capital gain of $100 and inflation of 5%, then you’d count your income as $95, while if you’d held it for 10 years with the same gain of $100, but over that period inflation was 50%, then you’d count your income as $50. Inflation factors could be published as a simple table in the tax guide(less than a page would do it easily, a few lines would be adequate).

The calculations are no more complicated than what is involved now, but the results would make a little more sense in that they’d stop rewarding short-term speculation and make long-term investment equally attractive.

(While maintaining capital value for one person makes sense, it does not follow that this approach is applicable to inheritance or other gifting, but that’s a different discussion)