Minister spreads misleading info about capital gains tax increase

A tax lawyer turned legislator joins me to debunk his claims, that could impact your tax return if you take them at face value.

This morning, Canadian federal Justice Minister Arif Virani posted an egregiously bad "explainer" video regarding the federal Liberal government's highly contentious capital gains tax increase. The video was riddled with misinformation that could cost some Canadians big bucks if his advice is taken to heart.

To be clear, the Liberal's capital gains tax increase will negatively impact every Canadian, no matter if they are claiming one on their tax return or not. But for those who do have to claim an increase, if those people took the claims Mr. Virani made in his video at face value, they could cause massive tax problems for them.

So, to debunk Mr. Virani's misinformation, I'm joined today by my colleague Philip Lawrence, the Member of Parliament for Northumberland—Peterborough South. Philip holds both a law degree and an MBA, and focused his previous law practice on taxation.

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Michelle: Philip, let's get right into it. In his video, Mr. Virani claimed, "People…have talked to me about the fact that they might have a second property, like a cottage. First of all, if you pass on that cottage to someone in your family, there is no capital gain that's incurred." Should people believe that?

Philip: No, because what he said was extremely misleading. There is no special definition for "family cottage" within federal tax provisions. The fact is that if someone owns a second property that they use for recreation unless they pass on that property to their spouse or common-law partner, capital gain is usually incurred. Said differently, if that property is gifted or sold to anyone other than a spouse or common-law partner, someone will likely have to pay capital gain taxes on its increased value, so the Liberal's new tax increase could apply to them.

Michelle: Mr. Virani also claimed that capital gains of less than $500,000 won't be affected by the new tax increase when he said, "If you do sell the cottage outside of your family, and you purchased the cottage for $300,000, and sell it for $800,000, there's absolutely no change that affects you.". Is that true?

Philip: Well let me clarify, in the federal budget - and let's remember that the Liberals haven't yet tabled a bill to formally implement the tax increase - every Canadian is given a $250K exemption from the increased inclusion rate. Mr. Virani is fudging the truth by assuming that two spouses own a property equally, thereby allowing them to double the exemption. In many situations (because of the death of a spouse or otherwise), the property is only owned by one person, meaning that only one exemption is available. So, in Mr. Virani's example, $250,000 could be taxable at the Liberal's increased rate of 66.67%. 

Michelle: Referring to the same example above, Mr. Virani also says that only the amount above $500K is taxed at the new 66.67% rate. But that figure refers to the amount of income that is included for tax purposes, not the tax rate, right? What was he doing there?

Philip: Yes, exactly. He is conflating the inclusion rate (the amount of the gain that is taxed) with the income tax rate (the rate at which the gain is taxed). This discussion is complicated enough without the Federal Minister of Justice spreading misinformation.

Michelle: Yikes, that's brutal. From there, Mr. Virani went on to claim that the Liberals' increase to the capital gain tax was competitive with other jurisdictions, specifically naming New York and California. He also talked about previous rates. All of it seemed a little sus to me. What are your thoughts?

Philip: I hate using this term, but gaslighting fits perfectly. He's comparing apples to oranges here because the United States taxes capital gains differently than Canada. The United States reduces the rate of taxation—not the "inclusion rate." For example, the current Federal capital gains rate in the United States (for long-term gains) is around 20%, which means even at a 100% inclusion rate, Americans are paying less on capital gains than Canadians are. 

Additionally, the U.S. rates Mr. Virani referenced are state taxes only, which are significantly less than both U.S. federal tax and Canadian federal tax rates. For instance, the total capital gain tax on an asset sale in California (the state with the highest tax) is less than 14%. In Ontario, that rate will increase from 27% to around 31-32%.

This leads to another point Mr. Virani conveniently omitted. It is vitally important for Canada to have a competitive capital gains rate - particularly with the United States - because Canada is in the midst of a productivity crisis that is being fueled in large part by a lack of capital. Canadian workers are not receiving the investment they need to win in the global economy, and by making capital more expensive, we are only worsening the problem.  So, the Liberal's tax hike will translate into fewer jobs, lower standards of living for Canadian workers, and less revenue for the government - all of which are reasons why this tax should be opposed.

As for previous rates, another point Mr. Virani omits is that the rate pre-1996 included a zero tax exemption on the first $100k of capital gains. This effectively reduced the actual inclusion of a $250k capital gain to less than 50%. Adjusted for inflation, that exemption would be almost 80% higher today, or about $180,000 at a zero rate. The Liberals don’t have this in place, so it’s false to directly claim their tax increase to previous rates.

Michelle: A great point that leads nicely into my next question. Mr. Virani mentions something about a small business exclusion. However, the $1.25 million exclusion has many restrictions, and it applies only if qualifying small business shares are sold, so it won't apply to all small businesses. Why would he make it seem otherwise?

Philip: First off, the current Capital Gains Exemption is $1 million, not $1.25 million, because the Liberals have not tabled legislation to make this change yet. Who knows what will be in that legislation - the Liberals have a habit of saying one thing and doing another. Further, this applies only to the sale of Qualified Small Business Shares. It does not, for example, apply if a business is not incorporated or if the business sells its assets (as opposed to the shares of the corporation). And small business incorporations do not benefit from the $250,000 personal exemption, which means that a higher inclusion rate will start on their first dollar of capital gains.  

Mr. Virani is attempting to downplay the damage their increase in the capital gains inclusion rate will have on businesses, but the horse has already left the barn. A Canadian entrepreneur recently told me that the Liberal's capital gains increase amounts to "a tax on our ambition." 

Michelle: Mr. Virani made it seem like this wasn't a big deal for small businesses, but their tax increase isn't just about the small business shares we discussed above, right? 

Philip: That's right. Another reason many small business owners are upset about the tax increase is that they have investments in their companies, which they often use to attempt to save for retirement. The Liberal's tax hike means that investment income will be taxed higher due to the change in the capital gains inclusion rate, thereby reducing the value of any potential retirement savings. The higher capital gains rate can also affect the small business tax rate on operating income.  If investment income is more than $50,000, then the following year's small business deduction will decrease thereby increasing the tax rate on operating income.  

This Liberal Government continues to increase the cost and difficulty of doing business in Canada, and ultimately, Canadian workers will pay the price in lower wages and fewer opportunities.

Michelle: Mr. Virani closes the video by suggesting that this tax increase will make life "more fair" for Canadians, but virtually every expert disagrees with this claim. I read a great article in the National Post a while ago that laid out why. What's your take?

Philip:  The best measure of individual economic strength, the underpinning of our standard of living, is GDP per capita.  Over the last ten years our GDP per capita has only grown by 4%, whereas over that same period the United States GDP per capita has grown by 50%.  In other words, our incomes have been stagnant while the cost of living has skyrocketed.  There just is absolutely nothing fair about doubling of rents, record usage of food banks and increasing rates of child poverty so Mr. Virani's claim is completely bunk.  The Liberal's increase to the capital gains tax will make things worse, for all the reasons outlined in the article you referenced above.

Michelle: What strikes me the most about Mr. Virani's misinformation-riddled video, besides the fact that if some people take his word at face value they could be facing massive negative tax implications, is that he's the Minister who is trying to ram through bill C-63, the Liberal's latest massive censorship bill. You're on the committee that regularly fights this type of censorship legislation. What does today's misinformation-laden video from Mr. Virani on such a substantive, high-stakes topic say about the need to repeal the Liberal's previous censorship legislation and prevent them from passing more?

Philip: Great point. Both Mr. Virani and I were taught about standards of care in law school. A standard of care is the level of competency you owe another individual. In simple terms, the more power you have, the greater your responsibility to those affected by your words and actions.  As Minister of Justice, Mr. Virani has one of the highest standards in the country.  For him to release this misinformation-filled video is irresponsible.

Michelle: So the question everyone wants to know the answer to, what are we (the Conservatives) going to do about all of this?

Philip: Our party leader, Pierre Poilievre, has vowed to oppose this job-killing tax hike, and also to undertake a review of the entire tax system within 60 days of taking office to ensure our country is competitive and so that Canadians can thrive instead of barely scrape by, as millions are doing under this Liberal government.

**Special thanks to Wilson Lentz LLP, a Chartered Professional Accountant firm (and my office neighbors), for letting me bounce a few questions off of them about some of Mr. Virani's tax based claims as I conducted background research for this Q&A with Philip. Shout out to my colleague Greg McLean, MP for Calgary Centre - another financial expert, for his contributions to this piece. And a big round of applause to MP Damien Kurek for catching the video this morning to begin with. I work with a great team.