The federal government first introduced capital gains taxes in 1972. Prior to that time, all capital gains were tax-free.
Ottawa brought in capital gains taxes, in part, to make up for doing away with inheritance taxes. Since then, Canadians have had to pay tax on a portion of their capital gains, with the rules, rates, and exemptions changing several times in the ensuing 28 years.
What is a capital gain?
Basically, it's the difference between an asset's total cost price and its total sale price.
For example, if you bought 100 shares of Nortel at $90 each for a total cost of $9,000, and then sold them for $100 a piece, your profit of $1,000 would be considered a capital gain.
However there are some situations that do not trigger a capital gain, such as selling your principal residence for more than you paid, or profits made in various tax-sheltered vehicles such as RRSPs, RRIFs or RESPs.
Capital gains tax: a brief history
Canada is not alone in its practice of levying taxes on capital gains.
The U.S. first introduced a tax on capital gains around 1860 to finance its war against the southern confederacy, and Britain launched its capital gains tax in the 1960s, mainly to finance its social security programs.
In 1972, Canada's entire tax system was overhauled and a tax on capital gains was implemented for the first time in the country's history.
Canada's capital gains tax was introduced in part to finance the growing costs of Canada's social security system and to create a more equitable system of taxation.
From 1972 to 1988, Canadians had to pay tax on 50 per cent of their capital gains.
That meant that if you made $1,000 profit on an investment that was not held in a tax-sheltered vehicle, you would pay tax on $500 of that gain at your top marginal tax rate.
Then in 1988, the government increased the capital gains tax inclusion rate to 66.67 per cent, meaning that you would have to pay tax on two-thirds of your profits.
In 1990, it was jacked up even more, to 75 per cent.
But this February, investors saw some relief as the capital gains tax rate was notched back to two-thirds, or 66.67 per cent.
Who profits from tax breaks on capital gains?
Government figures from 1997 indicate that 45 per cent of total capital gains tax breaks went to individuals earning more than a quarter of a million dollars a year. People in that tax bracket amount to less than one per cent of the population.
But figures from the TSE show that almost half of all Canadians now own stocks directly or indirectly (through mutual funds). For those who own securities outside tax-sheltered accounts like RRSPs, they will pay less tax on stock profits they take after January 1, 2001.
But very few lower income Canadians will see a direct benefit from this cut, as most don't own stocks outside RRSPs, and most don't have a cottage or second home (the other major asset that typically attracts capital gains taxes on its sale)
Wasn't there a capital gains exemption for a while?
Yes, there was. In 1985, the government introduced a capital gains exemption, where each Canadian did not have to pay any tax on capital gains up to a lifetime maximum of $100,000.
But the government decided to abolish the exemption as of February 22, 1994.
There is still a $500,000 capital gains exemption in place for certain circumstances, such as owners of qualified small businesses or farms, but most Canadians now don't qualify for any capital gains exemption.