What is capital gains tax? How is it going to affect the economy and the younger generations?

The federal government says its plan to increase taxes on capital gains is aimed at wealthy Canadians to achieve “tax fairness.”

The government’s new revenue stream is projected to rake in $19.3 billion over the next five years by increasing the capital gains inclusion rate - the share of capital gains that are taxed - from 50 per cent to 66 percent for individuals with more than $250,000 in capital gains in a year.

What is the capital gains tax?

Dr. Malik Shukayev, associate professor at the University of Alberta’s Economics Department told CTV News capital gains tax is the tax individuals pay when selling their properties, assets, bonds or stocks.

“Capital gains tax happens when people buy some investment property and then sell it out at a higher price. So, the difference between the sale price and the purchase price is the capital gain,” said Dr. Shukayev.

When it comes to businesses, Shukayev says, the difference between the cost of establishing the business and the market price when selling the business is considered a capital gain.

When you buy stocks for one price and then you sell them for a much higher price, that’s also considered capital gains, Shukayev added.

What is the difference between revenue tax and capital gain?

He says that businesses and corporations pay taxes on their yearly revenue, and that is not the same as capital gains tax. Capital gains are the profits companies or individuals incur when selling assets, he notes.

“Stocks, when you buy them, they pay dividends. The dividends are not capital gain. That is different. That’s being taxed by different types of income taxes or dividends taxes,” Shukayev explained.

“So, any dividend or interest or income that people receive from businesses in not part of capital gains.”

Who is going to be affected the most by the increased rate of capital gains tax?

Start-ups are going to be affected the most, Shukayev said, noting these companies do not have a lot of access to funding in Canada. He adds that the lack of funding makes it hard for local businesses to pay good salaries for their employees, as they “are just not established.”

“So, what they do is, instead of paying high salaries, they promise to give employees stocks,” he said. “And the people are willing to do that because the stock option they’re going to receive is going to appreciate in value in the future when the business becomes successful.”

When the stock's value is going to increase, employees will have to pay the capital gains taxes when they sell.

He notes that the stocks are really important for Canadian IT start-ups, as they usually offer their developers stock options for their compensation package, noting that it puts them at a disadvantage when competing with their U.S. counterparts.

“For example, let’s say you start a company with an initial value of $1 million, and if you’re successful it rises to $100 million after a few years. When you sell, the capital gain will be the difference between the initial value and the selling value, which amounts to $99 million,” he explained.

He says that the owners will not be as motivated to start a company, as the more they are going to make, the heavier their capital gain tax is going to be.

The change does come with exemptions for entrepreneurs including a lifetime maximum of $2 million through the Canadian Entrepreneurs' Incentive and an increase from $1 million to $1.25 million for the sale of a small business, fishing, or farming property through the Lifetime Capital Gains Exemption, announced the government on April 16.

Is the change in capital gain tax going to lower the cost of living and achieve “fairness” for everyone?

Shukayev says the new policy is going to drive inflation and the cost of living further up.

“For example, when taxing something more, the cost of labor increases. So, in this case, it will just increase business taxes,” Shukayev said.

“I don’t see any scenario in which it actually lowers inflation. I think it will be the opposite.”

When it comes to rental properties, Shukayev says, it will lower the supply as less people will be looking at buying a second property as an investment. He says it’s still early to determine what the rental market is going to look like. He also says that those who already have a rental property might now be encouraged to sell before the change comes into effect this summer.

And when it comes to productivity, he says, Canada will be placed in a weak position compared to other countries and that is not good for our economy.

He adds innovation, which is a driving factor for the economy is going to suffer, putting Canada’s economic development at risk.

He notes that younger entrepreneurs and the younger generation are going to be hit hard by the new tax hike.

The Business Council of Canada has also voiced concerns about the capital gains measure in a statement following the budget’s release on April 16, saying it’s “particularly troubling.”

With files from CTV News Windsor’s Ricardo Veneza and CTV News National’s Rachel Aiello