04/24/2024
"Upcoming Changes to Capital Gains Tax in Canada: What You Need to Know"
When you sell an investment or asset for more than its purchase price, the profit is known as a capital gain. For instance, if you buy a cottage for $400,000 and later sell it for $500,000, your capital gain is $100,000. Conversely, selling an asset for less than its purchase price results in a capital loss.
Capital gains and losses can occur with various investments and properties such as stocks, bonds, mutual funds, rental properties, cottages, and business equipment. These do not apply to your primary residence.
What is capital gains tax?
In Canada, capital gains are subject to taxation. The amount of tax you owe depends on several factors, including how the capital gain is classified as income in the year it is realized, which is the year the asset is sold. However, only a portion of the gain is taxable.
Current and Future Capital Gains Tax Rates
Currently, only 50% of a capital gain is taxable, known as the capital gains tax inclusion rate. For example, if you make $100,000 from selling a cottage, $50,000 of that gain is considered taxable income for that year.
Consider this scenario:
Your annual income from your regular job is $75,000.
You earn a $100,000 profit from selling a cottage.
Half of that profit ($50,000) is taxable, leading to a total income of $125,000 for that year.
The tax payable will depend on your tax bracket and marginal tax rate.
Pending changes to the tax rate:
The proposed federal budget for 2024 includes changes to the capital gains tax inclusion rate. The rate will increase to 66.67% for all corporations and trusts and for individuals with gains exceeding $250,000. For gains below this amount, the rate remains at 50%.
Who will be affected?
These changes will impact all corporations and trusts, as well as individuals with capital gains over $250,000.
Capital gains tax does not apply to your primary residence, so these changes could affect you if:
You sell a secondary property, like a cottage or rental property, and the profit exceeds $250,000.
You sell investments that have appreciated by more than $250,000 from the original purchase price.
Effective Date
If approved, these changes will be effective from June 25, 2024.
It is estimated that the majority of Canadians, around 28.5 million, will not be affected by these changes as they do not have capital gains income that surpasses the $250,000 threshold. However, if you are among those affected, consulting with a tax advisor or financial planner could be beneficial to mitigate the effects of the increased tax rate on your finances.
