Canada Capital Gains Tax Changes 2024

Changes in Canada Capital Gain Tax 2024

The Canadian federal government announced changes to the rules in the April 2024 Federal Budget that will go into effect starting June 25, 2024. These changes particularly impact the taxation of estates and will likely have a profound impact on estate/succession planning for both Canadian residents and non-residents with investments/assets located in Canada going forward. The draft proposals raise several unanswered questions and present taxpayers with an opportunity to consider whether any steps should be taken in advance of the June 25, 2024, effective date of the proposed changes, as well as what steps should be taken in the future to mitigate the adverse effects of the proposals. Here’s what you need to know about the changes to Canadian capital gains tax rules for 2024 and whether they could apply to you.

Understanding Changes in Capital Gain Tax in Canada 2024

The Government of Canada has proposed raising not the tax rate but the inclusion rate on capital gains—which include profits from the sale of assets like stock or property—from one-half to two-thirds. Essentially, this means that a greater percentage of capital gains will soon be considered taxable income, potentially bumping some individuals and companies into new tax brackets.

By doing this, the feds hope to help finance billions in spending on housing and other priorities and increase tax fairness between middle-class and wealthy Canadians.

Changes to Canadian Capital Gains Tax for 2024 Explained

Raising the inclusion rate on capital gains

For over twenty (20) years, a fifty percent (50%) inclusion ratio was applied to all capital gains, whether arising from sales or the various Canadian-deemed disposition rules. This means that half of the capital gains are considered taxable income and subject to tax.

For individuals, companies, and trusts, the inclusion rate on capital gains, or the proportion considered income for tax purposes for the year that an asset was sold, is being raised from half (50 percent) to two-thirds (67 percent).

For individuals, this increase will apply only to capital gains realized annually beyond CAD 250,000. The first $250,000 will continue to have a 50 percent inclusion rate. For companies and trusts, this inclusion rate hike from half to two-thirds will apply to all realized capital gains.

To offset the impact of this hike on entrepreneurs in tech and other sectors, the feds are also proposing the two other capital gains tax changes outlined below.

Increasing the Lifetime Capital Gains Exemption (LCGE)

The cumulative Lifetime Capital Gains Exemption (LCGE) is being increased from just over $1 million to $1.25 million. Going forward, the LCGE will continue to be indexed to inflation.

The LCGE is a longstanding tax exemption designed in part to help encourage risk-taking among small business owners. It enables entrepreneurs to claim deductions to their taxable income for capital gains when they sell qualified small business shares they have held for at least two years in Canadian-controlled private corporations (CCPCs). To be a CCPC, a company must be privately held with an aggregate of shareholders that is more than 50 percent Canadian.

Launching the Canadian Entrepreneurs’ Incentive (CEI)

A new Canadian Entrepreneurs’ Incentive (CEI) is being launched to reduce the inclusion rate to 33.3 percent on a lifetime maximum of $2 million in eligible capital gains. According to the Government of Canada, this incentive was designed with the tech sector in mind and modeled after the qualified small business stock exemption in the United States (US).

The CEI will be available to entrepreneurs and founding investors in certain sectors who own at least 10 percent of shares in a business that has been their principal employment for at least five years. The feds plan to phase in the CEI gradually over the next 10 years by $200,000 annually, beginning in 2025, until it reaches $2 million in 2034.

Capital Gains Tax on Investment Income

Canadian capital gains tax applies to investments held in certain accounts. There are ways to avoid capital gains taxes on profits made in your investment portfolios.

When you realize capital gains on investments in the following accounts, you are exempt from capital gains taxes:

  • TFSAs: TFSAs are tax-free, meaning withdrawals are not taxed. Some taxes apply to dividend income from U.S. investments, though. Using a TFSA for your investments can help you avoid capital gains tax. Just be sure to stick to your annual TFSA contribution limit to avoid penalty.
  • RRSPs: Profits made on RRSP investments are not subject to capital gains tax. If you withdraw from your Registered Retirement Savings Plan (RRSP), you won’t be taxed on your capital gain, but you will be taxed at your marginal income rate. Also, if you convert your RRSP to an RRIF upon retirement, your gains will not be subject to capital gains tax, but instead, the RRIF payments will be considered ordinary taxable income.
  • FHSAs: Contributions made to the First Home Savings Account (up to $8,000 per year, and a lifetime maximum of $40,000) are not taxed when withdrawn from the account to buy a first home. Returns and income earned on any investments housed within the FHSA are also sheltered from capital gains.
  • Registered pension plans: Capital gains within registered pension plans such as the CPP/QPP will still be tax-free.

Capital gains tax does apply to investment income in other cases, though, such as when you sell stocks held in non-registered investment accounts or if you are day trading. The new capital gains tax inclusion rate will apply to profits made on investments, like when you sell stocks held in non-registered accounts - if you have more than $250,000 in total capital gains in a year.

Keep a record of any fees you pay for buying or selling stocks or securities, like brokerage fees, commissions, or management expense ratios (MER). You will need to use this to calculate your expenses in the capital gains formula, and potentially reduce your capital gains.

Capital Gains Tax on Real Estate

One of the most impacted groups of the new capital gains tax inclusion rate are small-scale real estate investors, such as those who have a second property for rental purposes, or a recreational home, like a cottage.

While the sale of a primary residence (the home lived in by the seller) is always 100% sheltered from the capital gains tax, rental unit, and cottage sales will be subject to the original capital gains rate of 50% on the first $250,000 of profit, and at 66.7% on the remaining amount.

How to calculate capital gains on the sale of an investment property

For example, let’s say a cottage owner originally purchased their property 20 years ago for $300,000, but sells it this summer (after the new rate takes effect) for $800,000, meaning they’ve made a profit of $500,000.

Let’s break down what their capital gains tax bill would look like, using the following formula:

Proceeds of disposition – (ACB + Expenses) = Capital Gains

What do these terms mean?

  • Proceeds of disposition:This refers to the sale price of the property. In our example, this amount is $800,000.
  • Adjusted cost base (ACB):In the context of real estate, the ACB refers to the original price you paid for the property, in addition to other costs paid during the purchasing process (such as legal fees and closing costs). The ACB also includes the cost of any improvements you made to the property, (such as renovations) that have contributed to its current value. For our example, let’s assume our investor paid $2,000 in lawyer fees when buying the property, and then spent $60,000 building an extension on it at some point in the following years.
  • Expenses:These refer to any money spent specifically to prepare and sell the property. This can include anything from repairs, staging, and marketing the property for showings, to commissions and fees paid to real estate brokers. It also includes closing costs such as legal fees. For our example, let’s say our selling expenses total $1,000.

Based on these amounts, our capital gains formula looks like the following:

$800,000 - ($300,000+2,000+$60,000+1,000)= $437,000

$437,000 is the capital gains amount you will now be taxed on.

Now, we apply the tax inclusion rate as follows:

  • 50% for the first $250,000
  • 7% for the remaining $187,000

($250,000 x 0.5 = $125,000)  + ($187,000 x 0.667 = $124,729) =$249,729

$249,729 is the amount you must add to your income when filing your taxes, which is then taxed at your marginal tax rate.

However, if the property is being sold by a corporation or trust, the new capital gains tax rate of 66.7% is then applied to all capital gains. Using the same scenario as above, this would result in a taxable income gain of $291,479 ($437,000x 0.667%).

What is Not Changing About Capital Gains Taxes

Tax treatment of capital losses from previous years, which can be used to offset capital gains in future years, will remain the same. The feds also plan to maintain the exemption for capital gains from the sale of a principal residence.

Capital Gains Exemption Rules

A lifetime capital gains exemption applies to profits made from selling the shares of a small business, as well as from certain other businesses like farms. If you sell your principal residence, the sale is also exempt from capital gains taxes- but certain conditions apply.

Tax Strategies to Mitigate the Implications of 2024 Changes in Capital Gain Tax

Taxpayers should carefully consider whether any mitigating steps should be taken before the June 25, 2024, effective date of the capital gains inclusion proposals.  In addition, taxpayers will need to assess whether common operating procedures and policies should be re-evaluated for future years in light of such amendments.  We note the following strategies and procedures may need to be re-evaluated in light of the proposed capital gains inclusion regime:

To mitigate the implications of the 2024 changes in Canada's capital gains tax, several strategies can be considered:

1. Utilize the Principal Residence Exemption

Since the sale of a primary residence remains exempt from capital gains tax, consider designating properties as your principal residence where applicable. This can shield significant gains from taxation.

2. Maximize the Lifetime Capital Gains Exemption

For small business owners, farmers, and fishers, ensure you're taking full advantage of the increased lifetime capital gains exemption, which is rising to $1.25 million. Proper planning around the sale of these qualifying properties can result in significant tax savings.

3. Timing of Asset Sales

If possible, consider accelerating the sale of appreciated assets before June 25, 2024, to benefit from the current lower inclusion rate of 50%. Post-June 24, the inclusion rate will increase to 66.67% for gains above $250,000.

4. Harvest Capital Losses

Offset capital gains by realizing capital losses. Selling underperforming investments to recognize a loss can help reduce taxable capital gains. Be mindful of the superficial loss rule, which prevents claiming a loss on the sale of an asset if a similar asset is repurchased within 30 days.

5. Income Splitting

Involve family members who are in lower tax brackets in investment strategies. This can be done through gifting or family trusts, thereby spreading the taxable gains among individuals with lower marginal tax rates. Note that this must be done within the confines of income attribution rules to avoid penalties.

6. Consider Trusts and Corporations

Setting up a family trust or using a holding company can be a strategic way to manage capital gains. Trusts can distribute income among beneficiaries, potentially reducing the overall tax burden. Corporations can offer deferral opportunities and might benefit from tax planning strategies unique to corporate structures.

7. Deferral of Gains

Explore opportunities to defer the recognition of capital gains, such as using reinvestment strategies that allow deferral under specific circumstances, like rolling over gains into certain types of small business shares.

8. Strategic Charitable Giving

Donating appreciated securities to registered charities can eliminate the capital gains tax on those securities, while also providing a charitable donation tax credit.

9. Canadian Entrepreneurs’ Incentive

Take advantage of the Canadian Entrepreneurs’ Incentive, which allows for a reduced inclusion rate of 33.33% on up to $2 million in capital gains over a lifetime for qualifying entrepreneurial investments. This can significantly lower the tax payable on gains from these investments.

10. Professional Advice

Engage with a tax professional to develop a tailored tax strategy. Changes in tax legislation are complex, and professional guidance can ensure compliance while optimizing your tax position.

The Bottom line

Canadian capital gains taxes could apply to you if you are selling an investment asset. There are ways to reduce or avoid capital gains taxes, though, so it’s important to educate yourself on all of the options available to you. These changes can significantly impact tax planning strategies, so it is important to seek the advice of a professional accountant.

Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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