Federal Budget 2024: Key Changes to Canada's Capital Gains Tax

As part of the recently unveiled 2024 budget, Canada is set to adjust the capital gains inclusion rate, a move that could significantly impact investors and taxpayers. Let’s dive into what these changes mean and how they might affect you.

What Are Capital Gains?

Capital gains occur when you sell an asset or investment for more than you paid for it. For example, if you purchased a cottage for $400,000 and sold it two years later for $500,000, you have a capital gain of $100,000. Conversely, selling an asset for less than its purchase price results in a capital loss.

Capital gains and losses can arise from various types of investments and property, including stocks, bonds, mutual fund shares, rental properties, cottages, and business equipment. Notably, capital gains tax does not apply to your primary residence.

Understanding Capital Gains Tax

In Canada, capital gains are taxable, but only a portion of the gain is treated as income for the year you sell the asset or investment. The taxable portion is determined by the capital gains tax inclusion rate.

Today’s and Tomorrow’s Capital Gains Tax Inclusion Rate

Currently, only 50% of a capital gain is taxable. For instance, if you make a $100,000 profit from selling a cottage, $50,000 is added to your income for that tax year.

Example Calculation:

• Regular income: $75,000
• Profit from selling a cottage: $100,000
• Taxable portion (50%): $50,000
• Total income for the tax year: $125,000

The total tax you pay depends on your tax bracket and its marginal tax rate.

Proposed Changes in the 2024 Budget

The 2024 budget proposes the following changes to the capital gains tax inclusion rate:

• Corporations and Trusts: The inclusion rate will increase to 66.67%, up from 50%.
• Individuals with Gains Over $250,000: The inclusion rate will increase to 66.67%, up from 50%.
• Individuals with Gains Under $250,000: The inclusion rate will remain at 50%.

Who Will Be Affected?

These changes will impact:

• All Corporations and Trusts: Regardless of the amount of capital gains.
• Individuals with Capital Gains Over $250,000: For those with significant profits from selling secondary properties or investments.

Capital gains tax does not apply to your primary residence, but these changes could affect you if you:

• Sell a secondary property (e.g., cottage, rental, or investment property) and earn over $250,000 in profit.
• Sell investments with a profit exceeding $250,000.

Implementation Date

If approved, the changes will take effect on June 25, 2024.

Impact on Canadians

The federal government estimates that 28.5 million Canadians will not have any capital gains income next year, and three million others will fall below the $250,000 threshold. This suggests that the majority of Canadians will not be affected by these changes.

What Should You Do?

If you anticipate that these changes will impact your finances, consider consulting a qualified tax advisor or financial planner. They can provide strategies to minimize the impact of the increased capital gains tax inclusion rate.

By understanding these upcoming changes and planning accordingly, you can better manage your investments and tax obligations in the years ahead.

Disclaimer: The information provided in this article is intended as general information only and is not to be relied upon as constituting legal, financial, or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products, or services is expressly given or implied by Mark Koch & Associates, RE/MAX of Nanaimo, or any of its affiliates.