SUBJECT: CONFLICT PROPERTIES
PURPOSE: This briefing note is a recommendation for changes in policy pertaining to the taxation of property in conflict.
ISSUE: There is too much regulation for the taxation of conflict property via capital gains tax.
Background:
The taxation of the transfer of property calls for vendors to pay a large capital gains tax. Capital gains can be defined as the income one pays on gains from selling capital assets. Just as citizens pay income tax, and sales tax, home sales are subject to taxation as well. One realizes a capital gain when he or she sells an asset for more than the adjusted cost base. In Canada, the law says that one must treat 50% of their capital gains as income on the tax return. This %50 is what is referred to as the inclusion rate. It determines the percentage of capital gains that will be taxed. Taxable capital gains are equal to total capital gain multiplied by the inclusion rate. As of 2020 the income tax brackets in British Columbia are as follows: $0 - $41725 taxed at %5.06; $41725.01 -$83451 taxed at %7.70; $84510 - $95812 taxed at %10.5; $95812 - $$116344 taxed at %12.29; $116344 – 157748 taxed at %14.70; $157480 – 220000 taxed at %16.80; and over $220000 taxed at %20.5.
Considerations:
There is currently an exemption on the payment of Capital Gains Tax when an individual opts to sell their primary residence. This exemption helps citizens to be able to reinvest their money in another primary residence. Further, there are also exemptions for property that is used for farming or fishing. With these exemptions in mind, it cannot be ignored that citizens, experience fallout especially with pertinence to family matters or matters pertaining to inheritance. It is the taxation on these types of property, which we will call, “conflict properties,” that is unethical. These people quarrel over property and they invest significant resources on court and legal fees. They pay lawyers to litigate through the judicial system and often these lawyers take a share of the property when and if they become the victor of the case. Families are torn apart through this process and they experience a significant amount of grief resulting from these cases that often last many years. Attitudes and behaviors change when money is involved and property is a matter where blood runs thick. The ethics of taxing these individuals becomes questionable the longer the individuals or families are in conflict. Is it right that the government profits from these conflict torn individuals and families with consideration that they have already gone through a significant amount of grief fighting in court? The last thing these people need is the government requesting a share of their already reduced capital gain. Under the constitution of Canada, Canadian rights and freedoms are identified. Canada values the equality, dignity, human rights. When we look at the issue of, “conflict properties,” it becomes evident that their taxation becomes a matter of a contention because values are not being upheld. For example, is it dignified that Canada tax these people that have already gone to court upon the transfer of property? Is it equitable? Does it become a human rights issue? The answer to the first question is no, it is not dignified. In fact, the taxation of these properties makes Canada look like its extorting those that are already experiencing hardship. In relation to the second question, it removes equity because the taxation that’s already taking away peoples dignity is causing these people to experience a reduction of capital which thus reduces their ability to be able to ascertain the benefits of society. Lastly, from human rights perspective, this is an issue because it is taking advantage of the misfortune of citizens, especially those that have fought in court and have paid substantial legal fees to win. The fact that Canada is taxing these properties thus becomes an issue of ethics. The stakeholders for this matter are the home owners, lawyers, the justice system and the government.
Options:
Option 1: Full exemption
This is option is not feasible as it will reduce the revenue of the government. If an exemption is to be granted or permitted, it should only be for residential zone property only. It is these dwellings that people use to raise their family. Having a full exemption will be the most equitable option available to the government. This will allow people to allocate their funds into more residential homes. Having a full exemption of residential properties will not be sustainable in the future as a main source of tax payer monies will no longer be available to redirect to social support programs.
Option 2: Partial exemption
If this option is selected, the government may opt to cap the exemption. This could be done by considering the legal fees for example if legal fees are over $100000 the inclusion rate can be reduced, further if legal fees are $150000 mentioned inclusion rate could be reduced even further than the previous. Doing a partial exemption will allow people to at least receive or recoup their funds in which they used for legal fees thus giving them more equity. This option is the more feasible and can be quickly implemented. The government can also find another source of funds to offset this program. Seeing as the loss wont be as great as the previous option, the government wont have as much a difficult time trying to cover the loss therefore, this option is more sustainable than option one.
Option 3: Status quo: Not working which is why we have options.
This is the most feasible option of all the choices the government has. However, it reduces the equity of the citizens who have already fought a gruesome court battle. The taxation then becomes a human rights issue as mentioned earlier. This option does not uphold the Canadian values that we Canadians take pride in. This option will continue the stream of revenue the government receives off of taxation however, the people who have fought in court for their property rights will still be in grief.
Recommendation:
Option two is recommended.
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