Evelyn Jacks and Kim Moody: The Real Tax News About Capital Gains

Building personal wealth allows people to manage financial risks and pursue new opportunities without relying on others. It also reduces financial stress and anxiety and averages down your marginal tax rate on income. So why do so few people in Canada invest in capital gains producing assets? Check out this week’s podcast, Real Tax News You Can Use with Evelyn Jacks and this week’s guest, Kim Moody, who will decipher some of the issues. Here’s a backdrop: 

The key reason why capital gains are so tax efficient: Only 50% of capital gains are added to income for tax purposes. There are several reasons for this tax policy: investing in capital assets can come with some risk, and a lower tax rate rewards that risk taking, which for the economy as a whole is an important side benefit, because it promotes entrepreneurship and innovation and with that new jobs and community benefits.  

Why don’t more people take advantage of these tax efficient opportunities to invest? Did you know that of our over 30 million tax filers in Canada only about 2.5 to 2.6 million Canadians report taxable capital gains annually? That’s only about 8-9% of tax filers. 

There are many reasons why there aren’t more capital gains declarations. One of them is that the income is taxable only when there is a disposition – actual or deemed.  So investors could be sitting on large sums of accrued gains that will be taxed later. Grammy’s ownership of a family cottage is an example. She is a widow and when she sells it, or upon her death, there will be a taxable event. 

But another reason is complexity: most people don’t understand capital gains taxation very well and as a result they may not be focusing on the wealth building advantages they may be missing out on.

And to whet your appetite even more for investment diversification, here’s a bit more real tax news you can use: It is true that the rich do get richer, even in a financial crisis. 

A 2014 OECD study, entitled “Focus on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer?” found that while the financial crisis of 2008 caused a temporary drop in top-1% incomes, those top incomes recovered quickly not just here, but in many countries. 

Why is that? One reason is that top earners diversify their incomes with tax-efficient sources. 

Higher earners generated more passive income from their investments over time and it came from source such as dividends, capital gains, and rental income. This increased their wealth while averaging down their marginal rate of tax.    

Lower earners, meanwhile, tend to invest in interest-generating investments which are subject to high tax rates, similar to employment and pension income

It’s noteworthy that in Canada, the richest of the rich receive about 20% of their income from capital investments; in France, that figure is almost 60%. 

Building your own wealth on a tax effective basis is empowering – for generations to come in some cases. Tune in for the basics of the tremendous tax advantages taxpayers can gain when they acquire financial assets like stocks and bonds and non-financial assets like a cottage or a business. You’ll be treated to some chuckles as well, as Evelyn and Kim share stories, led by our host, Geoff Currier. 

Real Tax News