Carney’s Stop to the Capital Gains Tax Changes—How It Will Impact Housing

Canadians and businesses can now expect some clarity and certainty surrounding two tax issues.

Canadian Prime Minister Mark Carney and his Liberal government recently announced that they would cancel the proposed increase in the inclusion rate for the capital gains tax. In addition, the Prime Minister confirmed that the boost in the Lifetime Capital Gains Exemption limit would be left at $1.25 million on small business shares and farming and fishing property – any jump in this exemption will be introduced over time.

Capital gains have been a crucial issue for the federal government over the past year, with Ottawa exploring other avenues to plug its gaping budget deficit. A capital gain is the difference between the cost of an asset and its sale price. Currently, 50 percent of capital gains are taxable in Canada and added to an individual’s income and taxed at their marginal income tax rate.

Last year, then-Prime Minister Justin Trudeau proposed increasing the capital gains tax rate to two-thirds for businesses, individuals, corporations, and trusts, registering a capital gain of over $250,000. Officials projected that the policy, which would have taken effect in June 2024, would generate nearly $20 billion in revenue over five years.

After some pushback by professional organizations, business groups, and economic observers, the measure was postponed and then axed by Carney. The Canada Revenue Agency (CRA) has assured businesses and individuals that anyone who has overpaid the capital gains tax will be reassessed.

While there has been a collective relief for many individuals and entities, the decision to eliminate the capital gains tax hike could generate gains for the broader economic landscape, especially during tumultuous tariff-fueled times.

How Capital Gains Changes Will Impact the Economy

Economists say the move is designed to recognize the role that builders and small businesses have to play in stabilizing the Canadian economy. With the data signalling slowing—or, in some cases, contracting—private investment and weak productivity, the country is flashing an SOS to generate more private investment, an increase in jobs, and greater business opportunities.

When first proposed, experts warned that the increase would have decimated Canada’s business climate even more by discouraging investment and disincentivizing small business owners. It would have also negatively affected Canadians’ retirement savings.

Would a capital gains tax hike dampen entrepreneurship? Many say the challenge in Canada’s economy is the lack of innovation.

The prime minister’s move could reverse deteriorating consumer and business sentiment and spur investor confidence.

“Let’s just kill that and think about how do we reduce capital gains taxes in Canada so we can incent Canadians to invest in Canadian companies for growth,” said John McKenzie, chief executive officer of TMX Group Ltd., the parent company of the Toronto Stock Exchange, in an interview with Bloomberg Business Network.

What About the Housing Market?

In particular, investment in real estate development would have decreased significantly, exacerbating the already problematic housing crisis.

Industry experts note that removing the capital gains tax hike will enhance investment and foster more construction, innovation, and investment in the Canadian real estate market. This would come when housing starts, which has been trending downward over the past year, sliding four percent in February.

“Canada is a country of builders. Cancelling the hike in capital gains tax will catalyze investment across our communities and incentivize builders, innovators, and entrepreneurs to grow their businesses in Canada, creating more higher-paying jobs. It’s time to build one Canadian economy – the strongest economy in the G7,” Carney said in a statement.

At the same time, it is a catch-22 for the federal government.

By cancelling the capital gains tax increase, Ottawa’s budget deficit will persist, adding to inflationary pressures and taking money out of the private sector. In addition, shrinking government revenues could also force policymakers to reconsider their housing affordability initiatives.

As for property owners and real estate investors, whether this will generate more selling interest or prompt households to keep their properties to themselves remains to be seen. Property values have already increased significantly in Canada in recent years, and the increase in the capital gains tax inclusion rate could have made things worse.

However, based on media reports, Carney is potentially depending on ending the capital gains tax hike to motivate investors to invest more in homebuilding.

As has been the case for the last several years, housing is one of the biggest issues facing Canada and will likely play a role in the upcoming election. Will ending the capital gains tax hike bolster affordability and stability?

Tariff Tumult

The proposed increase in the capital gains tax was always viewed as a stopgap measure to tackle the growing government deficit. However, after widespread complaints from the business community, it appeared that Ottawa’s approach was not welcome. Now that the United States is imposing tariffs on Canadian automobiles, aluminum, and steel – and lumber has been proposed – the looming risk of a trade dispute between the two countries will be a threat to the economy.

Wondering how these changes could impact your real estate plans?
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