Canadian Capital Gains Tax - a Reduction … a Hurray!!!

August 6, 2004
Tomas Harnin

Like the US, Canadian Capital gains tax were a major concern for a long time. In the year 2000 the Government of Canada introduced a Five-Year Tax Reduction Plan - the largest tax cut in the country's history. Under this plan, personal income tax rates were reduced at all income levels and a number of tax measures were introduced to create a tax advantage for investment and entrepreneurship in Canada.

For an owner of a small business in West Vancouver who wanted to move his office to be closer to his clients. The land he occupied presently would be sold at a high price and used for residential housing. But he could not afford the move because of Canada's earlier high capital gains tax.

The property presently occupied by him was bought in the 1950s at a very low price and the mortgage has long been paid off. The sale of this property would bring him a large amount of cash, 40 percent of which would have to be sent to Revenue Canada. The remaining money would not be sufficient to buy new office space of comparable size and quality in the new and more desirable location.

A cut in higher capital gains tax would mean substantial benefit to such small business owners. These tax changes in Canada would reduce the average Canadian business tax rate to 5 percentage points below that of the U.S. by 2005.

Although average corporate tax rates in Canada and the U.S. are similar on income up to C$75,000, they are significantly lower in Canada on income above C$75,000.

Start-up high technology companies in Canada can already benefit from several tax provisions that are more advantageous than what is available in other countries. These provisions include a C$500,000 lifetime capital gains exemption, low tax rates on small business income, and generous tax credits for research and development.

This adds to the Canadian tax advantage, especially for start-up companies. Businesses in Canada now have greater opportunities to raise financing.

The lower inclusion rate for capital gains makes investment and risk-taking more rewarding by allowing investors to retain more of their gains. As a result of this tax change, the typical top tax rate on capital gains is now lower in Canada than in the U.S. This makes it more attractive for individuals to make such investments in Canada.