The Government of Canada’s 2024 federal budget includes significant new spending on projects and programs, primarily aimed at getting more homes built faster. Among the most notable changes announced in this year’s budget are updates to the Capital Gains Tax, with a higher inclusion rate designed to help finance the ambitious new housing program. To help Canadian businesses and investors make sense of the proposed changes, Small-Books has broken down some of the key points to know with examples to show their potential impact.

What are capital gains?

In broad terms, a capital gain is the difference between an asset’s cost and its total sale price. An asset could be a real estate investment property, a stock, or a mutual fund. For example, if you were to purchase an apartment for $600,000 and later sell it for $750,000, you would have a capital gain of $150,000.

How are capital gains currently taxed?

At present, only 50% of capital gains are taxable. In the above case, the apartment seller would only need to pay tax on $75,000 of the total profit. This means that the current “inclusion rate” is one-half. So, when determining your taxable capital gains for the year, you would multiply your capital gain for the year by the current 50% rate.

What are the proposed changes?

The 2024 budget, announced on April 16, would raise the inclusion rate from one-half (50%) to two-thirds (66.6%) on capital gains over $250,000 for individuals. If these changes are implemented, this would mean that taxpayers would pay at the existing rate of 50% for the first $250,000 in capital gains, but for every dollar over $250,000, they would be taxed at the proposed 66.6% rate.

This would be the case for individual taxpayers, however, the budget also proposes that corporations and trusts would have all capital gains taxed at the new 66.6% rate.

If the budget is approved, the changes will go into effect on June 25th.

What do investors need to know about the Capital Gains Tax changes?

It’s important to note that the proposed changes do not impact the sale of primary residences, which remain exempt from the Capital Gains Tax. Despite this, some investors may need to assess the potential ramifications of the capital gains tax adjustments.

Those planning on selling a secondary home or rental property could find themselves subject to the higher capital gains tax rate, depending on various factors such as the property’s profit margin, and business structure. This announcement might prompt some to realize gains under the existing rules before the new rates apply, but just remember to consider all sides of these changes and their impact and consult a tax professional before selling.

Ending on a “the bright side”

Amongst the proposed changes included in the Government of Canada’s 2024 federal budget, the bright side is the lifetime capital gains exemption for small business owners… In the instance of an individual selling qualified small business corporation shares, that exemption will remain and budget 2024 proposes expanding it to $1.25 million of eligible capital gains, up from just over $1 million currently.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Small-Books assumes no liability for actions taken in reliance upon the information contained herein.

Canadians could be hit by increases to capital gains tax. Here’s what that means for investors and business owners: