Big changes are potentially coming to Canada’s capital gains taxes starting on June 25, 2024. That is the date the government proposed to increase the inclusion rate on capital gains for individuals, companies and trusts in Canada. Read on to figure out if the upcoming changes will have any impact on you. As of the date of this article being published, the Government has not released the legislation putting the proposal into law and therefore, until the legislation is released, much of what is being reported is speculative at best. In other words, while it is wise to look at your financial situation in light of the potential changes that may come as a result of the proposed legislation, it is not wise to make financial decisions to trigger capital gains on assets until the legislation is actually announced. There is always a chance the government may not go through with the legislation or that the legislation will be significantly different than what the budget announced.
WHAT ARE CAPITAL GAINS?
Capital gains are gains or profits made when an asset such as a non-registered investment portfolio or a rental property is sold. Gains inside a registered investment portfolio such as an RRSP or Tax Free Savings Account are not taxed. Usual types of assets that may lead to capital gains tax, include:
- Rental property
- Cottage or cabin that is not used as a principal residence
- Non-registered investment portfolio
- Shares of a private company
- Farming or fishing property
The important thing to remember is that in order for the capital gains tax to be applicable to your circumstances, you have to have sold or disposed of an asset that had increased in value from the time you first acquired it. For example, if you bought a rental property in 2010 for $100,000.00 and that property was sold in 2023 for $200,000.00, you would have realized a capital gain of $100,000 in 2023, which was the year of sale. Again, even though the property increased in value a bit every year for a decade, you realize or report the full capital gain in the year the asset is sold.
WHAT IS THE CAPITAL GAINS INCLUSION RATE?
Capital Gains inclusion rate is the percentage of the capital gain that is included in your income as a taxable capital gain. For example, a 50% or one-half inclusion rate means that one-half of the gain or profit is taxable capital gain. In the example above where an individual sold a rental property and had a $100,000 gain in 2023 when they sold it, a one-half inclusion rate would mean that one-half of the $100,000 gain would be considered taxable capital gain. In other words, not the entire $100,000 capital gain is taxable, only half of it is. Unfortunately, under the proposal set out by the Federal Government in April of this year, that inclusion rate may be increasing from one-half to two-thirds.
WHAT ARE THE NEW CAPITAL GAINS RULES IN 2024?
In April, 2024, the Federal government unveiled its annual budget and announced the government’s intention to increase the inclusion rate from 50% on capital gains realized annually above $250,000 by individuals. Keep in mind that what is getting lost among all of the hysteria about this proposal is that the inclusion rate for capital gains realized annually up to $250,000 by individuals will continue to be one-half. In other words, the higher inclusion rate only applies for those individuals who have capital gains above $250,000 and even then, the higher rate only applies to the amount of gains above the base $250,000 threshold. In other words, for an individual who has $300,000 in capital gains in a year, the 50% inclusion rate would apply for the first $250,000 and the 2/3 inclusion rate would apply for the remaining $50,000 capital gain.
It is important to note that the $250,000 threshold at which a lower inclusion rate applies for individuals does not exist for corporations or trusts. All capital gains realized by corporations and trusts are subject to the higher 2/3rd inclusion rate. For example, if a company owns a building and purchased it for $100,000.00 and sells it for $200,000 on June 30, 2024. Under the government’s proposal, the company would have to pay tax on 2/3rd of the gain rather than on half the gain, which would be the case if the building was sold on June 1, 2024.
CAPITAL GAINS ON PRINCIPAL RESIDENCE
There is no capital gains tax payable on the sale of your principal residence, even if your residence has increased in value significantly over the years. Any amount that a homeowner makes when they sell their home will remain tax free and will not be subject to capital gains.
SUMMARY
- Capital Gains are gains or profits made when an asset, such as stocks held in a non-registered investment portfolio or a rental property is sold
- For example, let’s say you purchased a rental property for $100,000.00 in 2010 and you sold that property in 2020 for $200,000. The capital gain in this case is the sale price ($200,000) minus the purchase price ($100,000) for a total capital gain of $100,000.
- Of that $100,000 capital gain, 50% of the gain was taxable – so you would have to pay tax on $50,000.00 (50% of the gain)
- After June 25, 2024, you would be taxed on 2/3 of the gain rather than on 1/2 of the gain
- In other words, if the government’s proposed intention to increase the inclusion rate goes through, after June 25, 2024, the individual who had a $100,000.00 capital gain would have to pay tax on $66,666.67 of that gain, rather than on $50,000.00.
- The big caveat however is that the inclusion rate for capital gains realized annually up to $250,000 by individuals will continue to be one-half. In other words, for the individual in the above example with the $100,000 gain, if that individual had no other capital gains in the year, the inclusion rate would continue to be one-half. However, it would go up to 2/3 of the gain for any gains above $250,000.