How the proposed capital gains changes will affect you

The 2024 federal budget has proposed an increase to the capital gains inclusion rate, a change that will have implications for both individuals and businesses.

If the budget passes, capital gains realized on or after June 25, 2024 will be taxed based on the new, increased inclusion rate. The following is a quick overview of the proposed changes and how they will affect you.

What are capital gains?

Put simply, when you sell a capital asset (stock, real estate, business asset) for more than you paid for it, the difference (less expenses) is considered to be a capital gain. These gains are subject to taxation under Canada's tax laws.

Example You buy a rental property for $200,000 and sell it for $300,000, giving you $100,000 in profit. During the sale, you had realtor fees of $12,000 and lawyer fees of $2,000, so we exclude the $14,000 in expenses from your profit. $100,000 in profit minus the $14,000 in expenses leaves you with a capital gain of $86,000. This portion, times your inclusion rate (see below), is the amount you will be taxed on.

What are the new proposed rules for individuals?

If passed, the inclusion rate (the portion of your capital gains on which tax is paid) for individuals would be as follows:

• capital gains up to $250,000 ➡ 50%
• capital gains over $250,000 ➡ 66.6%

Example You have a capital gain of $350,000. 50% of the first $250,000 will be taxed ($250,000 x 0.5 = $125,000), and 66.6% of the remaining $100,000 will be taxed ($100,000 x 0.666 = $66,600).

Total taxable income ➡ $191,600

What are the new proposed rules for businesses?

If passed, the inclusion rate for businesses would be as follows:

• all capital gains ➡ 66.6%

Example You have a capital gain of $350,000. The entire $350,000 will be taxed using the 66.6% inclusion rate ($350,000 x 0.666 = $233,100).

Total taxable income ➡ $233,100

What are the current rates?

The current inclusion rate for both individuals, and businesses, is 50%, regardless of amount.

When do these increases take effect?

June 25, 2024 is the date the changes would take effect if the budget passes. This means that all capital gains realized prior to June 25, 2024 would be subject to the current inclusion rate of 50%, and all capital gains realized on or after that date would be calculated using the new inclusion rates listed above.

Do I have to pay capital gains if I sell my house?

No, not if it's your primary residence. But if the house in question is a revenue property, then yes, you will be required to pay taxes on any capital gains realized from the sale of it.

Were any exemptions announced?

The Lifetime Capital Gains Exemption (LGCE) for capital gains on the sale of a small business, or qualified fishing/farming property, will increase by 25% from $1 million to $1.25 million, and will be indexed to inflation after 2025.

The government is also proposing the Canadian Entrepreneurs' Incentive, which will reduce the inclusion rate to 33.3% on a lifetime maximum of *$2 million in eligible capital gains

*the limit will increase by $200,000 each year, starting in 2025, until it reaches $2 million in 2034

How can I prepare for these changes?

Talk to your financial advisor or accountant. Some people will benefit from selling assets now, prior to the June 25 date. Others might benefit from waiting for the additional LCGE to take effect. Our team of Business Advisory experts or Financial Planning experts would be happy to help you prepare for the new changes.

Questions?

If you have any questions about this article, the proposed changes to capital gains, how to prepare for them, or any of our other related services, please contact one of our Business Advisory or Financial Planning experts, or complete the contact form below.