One of the biggest stories to come out of the latest federal budget centres on the changes to how capital gains will be taxed.
The planned increase in the capital gains inclusion rate is generating some big headlines and for good reason as it affects investors and anyone who own properties other than principal residences.
In short, if you are a Canadian making money from capital gains, you’ll be paying higher taxes, starting this year.
The increase:
Right now, anyone who disposes of capital property for a profit—other than your principal residence—only half (50 per cent) of the capital gain is included in your taxable income. That’s how it works under our current tax rules. The budget, however, proposes to increase the rate to two-thirds (66.7 per cent) for capital gains realized on or after June 25, 2024.
For corporations and trusts, this higher inclusion rate applies to all gains realized on or after this date.
Individuals, however, will still be able to take advantage of the 50% inclusion rate on the first $250,000 of annual capital gains. All gains realized before June 25, 2024 will be subject to the current 50% inclusion rate and that same rate will apply to the first $250,000 of capital gains realized from June 25 onwards. It’s only the excess gains above $250,000 realized after June 25 that will be subject to the new 66.7 per cent rate.
The increase is even larger for corporations and trusts. Corporations will have all their capital gains subject to the 66.7 per cent inclusion rate from June 25 onwards.
Who is most affected?
According to the Department of Finance, personal income taxes on capital gains will not increase for 99.87 per cent of Canadians.
“The good news is that these changes, which is an increase in the capital gains inclusion rate from 50 per cent to two thirds, will probably affect very few people,” Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth, told Global News.
The effects are expected to be isolated to the wealthier among us who have both the ability and the capital to generate more than $250,000 in capital gains in any particular year. These are high-income Canadians with a sizeable non-registered portfolio.
Here are a few other likely scenarios where taxpayers will be hit:
If you are a homeowner with a vacation property and you wish to sell it, the gain on that property (especially one that has been held in the family for decades, for example) could be much more than $250,000. If the property is sold after June 25, any gain over $250,000 will be taxed at the higher rate.
Investors who own income properties could also be affected. Any gains over $250,000 on the sale of an income property after June 25 will be taxable at the higher, two-thirds rate.
Estates are likely to be hardest hit, experts say. The year someone dies, there is a deemed disposition of all of their capital property at fair market value. If at the time of your death there is a sizable non-registered investment portfolio that has accrued gains, your estate will have to pay tax for any capital gains above $250,000 at the 66.7 per cent rate.
Anyone who experiences a big financial event could face tax increases. If you sell a family cottage or an investment property, or if there is a large, one-time sell-off of a person’s retirement portfolio, the higher tax rate comes into play.
The approach:
The good news, said Golombek, is that the budget announcement leaves enough time for people to manage their investments and estates.
You can get ahead of the change with some proactive planning. Realizing capital gains prior to June 25 seems to make the most sense and represents the biggest opportunity.
“Before making any moves, of course, check with your tax adviser,” says REALTOR® Sherry Rioux.
“While REALTORS® can assist you with just about every aspect of buying and selling, it is important to understand we are not experts in tax or legal issues,” adds Emma Baker. The Rioux Baker Team is happy to meet with clients and address their concerns. If they don’t know the answers, they will direct you to the source that does.
For specific, tailored advice about how to handle the change to the capital gains inclusion rate, visit the Rioux Baker Team at Sotheby’s International Realty Canada or email [email protected]. You can also follow them on Facebook.
Sources:
This article was sponsored by Rioux Baker Team at Sotheby's International Realty Canada, a 2023 CollingwoodToday Reader Favourite.