Canadians, changes coming in capital gains.
globeandmail.com
Capital gains tax to be cut
By SHAWN McCARTHY and HEATHER SCOFFIELD
Globe and Mail Update
Ottawa — Finance Minister Paul Martin is set to make a steep cut in capital-gains taxes as part of a Liberal election plan to boost Canada's performance in the high-tech economy.
In a mini-budget on Wednesday, Mr. Martin will drop the so-called inclusion rate for capital gains to 50 per cent from two-thirds, sources confirmed yesterday.
That means someone who sells shares for a profit would pay income tax on only 50 per cent of that profit; currently, they would pay income tax on two-thirds of the gain.
The new tax rate will apply immediately to capital gains realized after it is announced. Capital gains realized before Wednesday will be taxed at the old rate.
The cut is among a number of measures Mr. Martin is expected to introduce. As previously reported, he will drop the middle income-tax rate to 23 per cent from 24, a maximum saving of $400 per person, and raise the income thresholds at which the various rates kick in.
He will also hasten the elimination of the 5-per-cent, high-income surtax and speed up cuts in the corporate rate to 21 per cent from 28.
The capital-gains tax cut is the second this year. Taken together, the two reductions will mean a 33-per-cent drop in the take on such income.
In his budget last February, Mr. Martin dropped the inclusion rate to two-thirds from 75 per cent.
The reduction in capital-gains taxes is meant to stimulate investment in the Canadian stock market. In particular, the government hopes that more risky, high-technology startup firms will benefit.
However, critics argue the tax cut would be a boon for the rich, who are the biggest beneficiaries of such income.
The Canadian Alliance platform, released last week, also calls for the reduction in the capital-gains inclusion rate to 50 per cent, along with steep cuts to personal income-tax rates. The Progressive Conservatives have called for the elimination of capital-gains taxes.
With an election call expected next weekend, the Liberals are hammering together a platform that is meant to highlight their commitment to boosting economic growth and spreading out its benefits to more Canadians.
The Liberals will promise to increase spending in research and development, work with the private sector to encourage the introduction of high-speed Internet access across the country, and provide a range of measures aimed at encouraging training and lifelong learning.
In a speech in Toronto last month, Mr. Martin signalled the government's commitment to the so-called new economy. He said Canada should increase its level of venture-capital investment for new companies to among the top three internationally, and Canadian firms should raise as many dollars in initial public offerings on the stock markets for growing business as American companies do relative to the size of the economy.
The cut in capital-gains taxes is meant to promote both those objectives.
Toronto-Dominion Bank economist Don Drummond, who was a senior Finance Department official for Mr. Martin's last budget, said the capital-gains reductions would be a "powerful incentive" for Canadians to invest in the stock market.
He noted, however, the people earning capital gains would pay less tax on that income than they would on income earned from dividends or employment. That includes senior officers in many Canadian companies -- including bank economists -- who receive stock options as a significant portion of their compensation.
Jim Stanford, an economist with the Canadian Auto Workers union, said the cut in capital-gains taxes is an unfair and inefficient instrument to stimulate investment in the so-called new economy.
"I think it's an incredibly blunt way of boosting the new economy," he said yesterday. "Most capital gains have nothing to do with the new economy."
Most of the investors who would benefit from such a measure are "the old-money families of Rosedale and Westmount," who have very little appreciation of information technology. They would probably pocket most of the money or reinvest in the old economy, Mr. Stanford said.
While the tax cut would be meant to stimulate investment in high-risk high-tech stocks and increase the flow of venture capital, it would also encourage more investment in other high-risk areas such as real-estate speculation or currency markets, he added.
Mr. Stanford cited federal figures that show that in 1997, 45 per cent of the tax exemptions for capital gains were claimed by people making more than $250,000 a year.
Surplus money
Predicted federal surpluses available for tax cuts, new spending, debt reduction, after already-planned Liberal increases in health spending and employment insurance and decreases in EI premiums. (All figures are in $-billion).
Year Total After contingency fund and reserves
for slower economic growth
2000-01 $12.2 $12.2
2001-02 10.9 14.9
2002-03 11.5 16.5
2003-04 11.3 17.3
2004-05 7.0 13.5
2005-06 10.7 17.7
Total $63.6 $92.1
Source: Toronto-Dominion Bank |
