Your questions answered about the proposed capital gains tax changes
2024 federal budget proposes tax hike for large profits on asset sales
The federal government's 2024 budget includes significant new spending on projects and programs — and it's relying on revenue from a change to the capital gains inclusion rate to help pay for it.
So what is this inclusion rate and how does the change affect taxpayers? Here's what you need to know.
What are capital gains?
A capital gain is the difference between an asset's cost and its total sale price. An asset could be a cottage, an investment property, a stock or a mutual fund.
For example, if someone purchased a cottage for $750,000 and later sold it for $850,000, they would have a capital gain of $100,000.
Does the tax on capital gains include the family home?
There are some situations that don't trigger a taxable capital gain. If you sell your primary residence for more than you paid, or earn profits through tax-sheltered vehicles like RRSPs or RESPs, those gains are not taxed.
So if you're selling your primary home, this change won't affect you.
How are capital gains taxed and what's changing?
Right now, only 50 per cent of capital gains are taxable. That person who sold a cottage for $100,000 more than they paid for it is taxed only on $50,000 of the profit.
The 2024 budget would increase the "inclusion rate" from one-half to two-thirds on capital gains above $250,000 for individuals.
So for the first $250,000 in capital gains, an individual taxpayer would continue to pay tax on 50 per cent of the gain. For every dollar beyond $250,000, two-thirds would be taxable.
The budget proposes to tax all capital gains earned by corporations and trusts at the two-thirds rate.
If adopted, the tax changes would take effect on June 25.
Why set the lower tax limit at $250K for individuals?
According to federal government data, 28.5 million Canadians are not expected to have any capital gains income at all. Three million are expected to earn capital gains below the $250,000 annual threshold.
The data also indicates only 0.13 per cent of Canadians — people with an average income of about $1.4 million a year — are expected to pay more in personal income tax on their capital gains as a result of the change.
What does the change mean for property sales?
The 2024 budget maintains the existing exemption for capital gains from selling a principal residence.
It also retains an existing lifetime capital gains tax exemption on the sale of small business shares, and farming and fishing property.
The new budget proposes to increase that exemption to $1.25 million, and to index that figure to inflation thereafter.
Taxpayers who are gifted a property — or inherit one from their family — and then sell the property could face the higher capital gains tax rate. But that can change, depending on the size of the profit and whether the property becomes a primary residence.
Sahir Khan, executive vice president of the University of Ottawa Institute of Fiscal Studies and Democracy, said this scenario is "not uncommon in the generational transfer of wealth."
"They give you a house, you're a little worse off, but not a lot worse off," Khan said, citing the new capital gains inclusion rate.
Khan said an estate planner or an estate lawyer likely would advise transferring the property differently to ease the tax hit.
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With files from John Paul Tasker