Significant changes to Canada’s capital gains tax have come into effect, impacting many Halifax residents, from homeowners to real estate investors. Understanding these changes is crucial, as they can directly affect your financial planning, especially when selling property or making investments. The Canadian government introduced these adjustments with the goal of creating a fairer tax system. This blog aims to provide an overview of the new capital gains tax rate, what it means for you, and how to navigate these changes.
Capital Gains Basics
Capital gains arise when you sell capital property for more than its adjusted cost base (ACB)—essentially, the original purchase price plus any related costs, such as improvements or transaction fees. Capital property typically includes assets like residential homes, rental properties, shares in private corporations, and even farming or fishing properties.
Until recently, 50% of any capital gains were included in your taxable income. This percentage is known as the capital gains inclusion rate. This inclusion rate also applies to capital losses, where 50% of your losses (allowable capital loss) could offset other capital gains, reducing your overall tax liability.
The tax you owe is based on your net capital gain, which is the difference between your taxable capital gains and any allowable capital losses. This net amount is then added to your income and taxed at your marginal income tax rate.
Formulas:
Taxable Capital Gains = Total Capital Gain × Inclusion Rate
Allowable Capital Losses = Total Capital Losses × Inclusion Rate
Net Capital Gains = Taxable Capital Gains - Allowable Capital Losses
Net Capital Gains + Taxable Income × Marginal Income Tax Rate = Tax Liability
Understanding these basics is key to grasping how changes to the capital gains tax inclusion rate will impact you, particularly if you’re planning to sell or transfer capital property.
The New Inclusion Rate
As of June 25, 2024, the federal government introduced a significant change to the capital gains tax inclusion rate. Previously, only half (50%) of your capital gains were included in your taxable income. However, the new rules have increased this inclusion rate to two-thirds (66.67%), meaning a larger portion of your gains will now be subject to tax.
This change primarily targets high-income individuals and entities that realize significant capital gains annually, such as those with substantial non-registered investment portfolios or who frequently trade in real estate. For individuals, the new rate applies to net capital gains exceeding $250,000 per year. For corporations and most types of trusts, the higher rate applies to all net gains.
The increase in the inclusion rate narrows the tax advantage that capital gains previously had over other forms of income, making the system more income-neutral. The changes are designed to ensure that wealthier individuals and large corporations contribute a fairer share of taxes, while middle-class entrepreneurs can benefit from increased lifetime capital gains exemptions.
What This Means for You
The new capital gains inclusion rate will have varying impacts depending on your financial situation and the type of capital property you own. For individuals, any capital gains and losses realized before June 25, 2024, are still subject to the previous 50% inclusion rate. However, for gains realized on or after that date, the higher 66.67% rate applies to all capital gains exceeding $250,000 per year. For corporations and most trusts, the same situation applies, with the exception that all capital gains realized on or after June 25 of this year are subject to the new 66.67% inclusion rate.
This change is particularly relevant for those selling personal-use properties like cottages or rental properties, as well as farming or fishing assets. If you’re disposing of Qualifying Small Business Corporation shares or Qualifying Farming or Fishing Property, you may benefit from the enhanced Lifetime Capital Gains Exemption (LCGE) introduced in the 2024 Federal Budget, which can help offset some of the increased tax burden.
Estate planning may also be affected by the new rules. Under Canadian tax law, individuals are generally considered to have disposed of all their capital property at fair market value in the year of their death. The net capital gains from this deemed disposition are included in the final tax return, and now, with the higher inclusion rate, the potential tax liability could be significant. If you hold substantial capital property, it’s advisable to consult with wealth, tax, and legal advisors to ensure that your estate planning still aligns with your financial goals.
While these changes aim to make Canada’s tax system fairer, they also introduce new complexities. Whether you’re selling property, planning your estate, or simply managing your investments, it’s essential to understand how these rules will affect your financial decisions and take steps to minimize any negative impacts.
What’s Not Changing
While the new capital gains inclusion rate represents a significant change, several key aspects of the tax system remain unchanged, providing some continuity for taxpayers. Most notably, the Principal Residence Exemption continues to be in effect. This means that when you sell your primary home, any profit you make is still exempt from capital gains tax, ensuring that most Canadians won’t face additional taxes when selling their homes.
Another aspect that remains unchanged is the rule against averaging capital gains over multiple years. For individual taxpayers, the $250,000 annual threshold is strictly applied within the calendar year, and any capital gains exceeding this amount will be subject to the new inclusion rate. This means you cannot spread out gains over several years to stay under the threshold.
Additionally, the new rules do not allow for splitting the individual $250,000 threshold with corporations you own. This benefit is exclusively for individual taxpayers, while corporations and most trusts must include two-thirds of all their capital gains as taxable income.
There are also no exemptions for specific assets or corporations under the new rules. The two-thirds inclusion rate applies uniformly across all sectors, ensuring a consistent approach to taxation. Furthermore, the length of time you’ve held an asset or other distinctions doesn’t affect the rate at which your capital gains are taxed.
In summary, while the new inclusion rate changes how much of your capital gains are taxed, some fundamental aspects of the tax system remain the same, offering a degree of predictability as you plan your financial future.
The recent changes to the capital gains tax inclusion rate mark a significant shift in Canada’s tax landscape. Whether you're selling property, planning your estate, or managing investments, it's important to stay informed. We highly recommend reaching out to an accountant, tax specialist, or lawyer for personalized advice.
*Disclaimer: This article is intended for general informational purposes and is not intended to provide any tax or financial advice to the reader. Please consult an accountant, tax specialist, or lawyer about your unique situation. While we try our best to ensure the accuracy of the information in our blogs, we accept no liability for errors or omissions.
Author: Brynn Carmody
Real Estate Assistant
HalifaxCondos.co
Keller Williams Select Realty