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This year’s Federal budget marked the first increase to the Capital Gains inclusion rate since 2000, an announcement that many criticized as having significant consequences on both high income and middle class earners.
We answer four pressing questions about this monumental shift in tax policy.
Q1: What are Capital Gains and what changed in this year’s Federal Budget?
To understand this change, it’s important to know that a Capital Gain refers to the profit made when a capital asset, like a stock or property, is sold over purchase price. For example, if you bought a property for $100,000, and sold it for $150,000, you would have a capital gain of $50,000.
The inclusion rate determines how much of this gain will be taxed. In the April budget, the Government announced the rate would be increasing from 50% to 66.67%, which took effect on June 25, 2024.
Going back to our previous example, this means that, under the new rules, $33,335 would be taxable, compared to $25,000, which would have been the amount taxed before the change.
For individuals, that rate only goes into effect after the first $250,000 of capital gains per year, though corporations and most trusts must pay the new rate immediately.
Q2: What do I need to know if I have several investments?
If selling an investment, it’s important to understand that your tax burden may have increased, especially if you’re selling on behalf of a corporation or trust. Before making any decisions, keep the following in mind and consult with a trusted tax advisor:
- The capital gains reserve rule. For those getting paid in installments throughout several years, the taxable gain can be spread across up to 5 years. This allows you to take advantage of the $250,000 limit (and the 50% inclusion rate) several times.
- The Alternative Minimum Tax (AMT). For those with significant capital gains, the AMT could increase your tax burden, as the calculation now includes 100% of capital gains instead of 80%.
- Long-term growth could offset the inclusion rate increase, meaning holding onto investments for longer might be a helpful strategy.
Q3: How will Capital Gains affect the family home?
Capital gains from your principal residence (where you live) are typically exempt, but if a family owns a second property such as a cottage or home, the sale of that property would be taxable under the Capital Gains rules.
The size of your property can also affect your tax burden. A principal residence larger than 1.24 acres (or half a hectare) will trigger the Capital Gains tax.
Q4: How will a death or departure affect capital gains?
If a Canadian resident emigrates to another country, they’ll likely face a departure tax. In this case, the CRA would treat all existing assets as if they were sold, which could trigger capital gains on investments like property, bonds or stocks (with some exceptions).
Similarly, if a person dies, any investment in their name will likely also be deemed as sold, which, again, would trigger potential capital gains. Assets passed over to surviving spouses are exempt from these taxes.
The capital gains could be reduced in the above situations if proper tax planning has been established and discussed with your tax advisor.
Q5: What do the proposed capital gains changes mean for real estate investors?
Real estate investors should be aware that any sale could lead to an increased tax burden, potentially lowering profitability on certain investments. The latest Capital Gains inclusion rate increase could affect investment strategies, pushing some to avoid certain sales and opting to rent out properties over flipping them.
Investors could also consider selling assets annually instead of all at one time to take advantage of the $250,000 limit, allowing any profits under that amount to be taxed at the old Capital Gains inclusion rate of 50%.
As always, tracking the Adjusted Cost Base (ACB) is crucial, especially for capital expenditures like renovations, which could reduce taxable gains.
Most of all, it’s important to consult with an experienced tax team before making any decisions. Zeifmans has decades of experience supporting investors through changing tax laws. To connect with our team, please click here.
