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2017 CANADIAN BUDGET PREVIEW: Will This Be a “Tax Grab” Budget or Will the Liberals Stay the “Middle Class” Course?

Officials in Ottawa have told MT that there will be no significant changes to personal income taxes in this year’s federal budget. But that hasn’t stopped some experts from speculating that Ottawa will target high income earners in an effort to boost its coffers and reduce the deficit.

One persistent rumour has Ottawa increasing Canada’s capital gains inclusion rate up to as high as 75%, compared to the 50% rate now. Such a move could impact both the TSX and the Canadian dollar, said Gluskin Sheff economist David Rosenberg in a note to clients.

“Capital gains taxes ostensibly are a key source of revenue generation for the Liberal Party — it’s a given,” said Rosenberg.

The economist noted that the government of Pierre Trudeau was the first to initiate capital gains taxes in 1972. The inclusion rate was raised to 75% in 1990, but then later dropped to 67% and then 50% under former Prime Minister Stephen Harper.

Veteran financial analyst Stephen Jarislowsky calls the rumoured plan to increase the capital gains tax another “nail in the coffin” for Canadian investors, particularly at a time when the economic outlook is already relatively weak.

In a commentary in the Financial Post, Jarislowsky noted that based on combined federal and provincial tax rates, personal taxation has already reached a maximum level of 53% of taxable incomes.

“Taxing capital gains without accounting for long-term inflation means severe injury to actual earnings,” he added. “I do not object to paying 25% of any short-term (one-year) capital gain, but when it comes to gains that include a tax on inflation that occurred over long periods of time, it means severe injury to whatever real gain has been earned. The fair thing would be to establish inflation factors to determine real rather than nominal gains, and base a real tax on a real gain.”

The Canadian Centre for Policy Alternatives notes that over 90% of the benefit of the capital gains tax break goes to the top 10% of income earners. The centre argues that capital gains should be taxed at the same rate as employment income.

Financial advisor Cynthia Kett says she’s also heard that the capital gains rate could be taxed at 67% or 75%. “When you go from 50 to 75, that’s a 50% increase, so it could be a major hit for high income earners in particular,” she told BNN-TV.

The current government has signalled in the past that it has no problem taxing higher income earners rather than middle to low income earners, she notes. “It’s low hanging fruit, honestly.”

Kett points to another persistent rumour: the elimination of the dividend tax credit. She says this would have a huge impact on all investors because low rates of return on fixed income investments have people piling into dividend paying stocks.

MT Newswires will be providing extensive coverage of Budget 2017, with Ottawa correspondent Doug Watt providing stories from the lockup and filing those stories as soon as the budget embargo is lifted at around 4 pm ET on Mar. 22.