According to Ali Spinner, a Tax Partner with Crowe Soberman LLP, the recent federal budget introduced several changes to the tax system, with the increase to Canada’s capital gains tax regime being the most important change.
New Capital Gains Changes
Capital gains occur when investors sell assets like stocks, property, or businesses. As per the current scheme, after a $250,000 exemption, half of the capital gain is taxed at the filer’s marginal rate. The proposed capital gains changes would increase this to 66%. For gains under $250,000, there will be no capital gains changes, and the tax inclusion rate will be kept at 50%
The new rules regarding the capital gains changes will start on June 25, and Spinner believes many Canadians may sell assets before then due to the deadline.
Spinner advises to talk with your accountant to determine the actual tax rate, as it could be closer to 33% before June 25. She stresses the importance of taking professional tax assistance given the new rules.
For many tax filers, there will be a significant 33% increase in what is included in their taxes. Spinner talks about the changes in Canada’s capital gains tax regime. She believes that it is a big change that could take over 15 years before reaching an equivalent tax position.
Understanding Canada’s New Capital Gains Tax Regime
Currently, only half of capital gains are taxable. For instance, if someone sold a cottage for $100,000 more than they paid for it, they’re taxed on only $50,000 of the profit.
However, under the 2024 budget that will introduce the changes in capital gains, the inclusion rate would increase from half to two-thirds on capital gains above $250,000 for individuals. This means that for the first $250,000 in capital gains, individuals would still pay tax on half of the gain. However, for an amount beyond $250,000, two-thirds of the amount would be taxable.
However, it is important to understand why the lower tax limit has been set at $250K in Canada’s capital gains tax regime. According to federal government data, 28.5 million Canadians are expected to not have capital gains income. Notably, three million are expected to earn capital gains below the $250,000 annual threshold.
The data also shows that only 0.13% of Canadians are expected to pay more in personal income tax after the changes that were introduced in Canada’s capital gains tax regime. This would majorly affect people whose annual income is more than $1.4 million.
According to the changes proposed in Canada’s capital gains tax regime, the 2024 budget keeps the exemption for capital gains when selling a primary home. It also maintains the lifetime exemption for small business shares, farming, and fishing property.
The new capital gains changes to Canada’s capital gains tax regime propose raising this exemption to $1.25 million and to index it to inflation thereafter. However, if someone receives or inherits a property and sells it, they might face a higher capital gains tax, depending on the profit and whether it becomes their main home.
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