Federal Budget 2024: What are the proposed capital gains tax changes and how might they affect me?

Canada’s recently unveiled 2024 budget proposes to adjust the capital gains inclusion rate. What does this mean for investors and taxpayers? Read on to find out how these changes might affect you.

What are capital gains?

When you sell an asset or investment for more than you paid for it, that difference is your capital gain. For example, say you bought a cottage for $400,000 and two years later, sold it for $500,000. You have a capital gain of $100,000. On the flip side, when you sell an asset for less than you bought it for, you have a capital loss.

You can realize capital gains and losses on several types of investments and property, including stocks, bonds, shares in mutual funds, rental properties, cottages, even business equipment. Capital gains and losses do not apply to your primary residence.

What is capital gains tax?

In Canada, capital gains are taxable. How much tax you pay depends on a few factors. That’s because the value of a capital gain is treated as income during the year in which you realized it – in other words, in the year you sold your investment or property. But it’s not the full value of the gain that gets taxed – rather it’s only a portion.

The capital gains tax inclusion rate – today and tomorrow

Today, only 50% of the capital gain is taxable (this is known as the capital gains tax inclusion rate). This means that $50,000 of the $100,000 earned from the sale of the cottage in our example is added as income for that tax year.

Here’s an example:

• Your regular income, earned from your full-time job, is $75,000

• You make a $100,000 profit from the sale of your cottage (after you pay real estate fees, closing costs, etc.)

• 50% of the profit is taxable, which means you add $50,000 to your income during the tax year in which you realized this capital gain

• $75,000 + $50,000 = a total income for that tax year of $125,000

The amount of tax you ultimately pay in that year will depend on your tax bracket and its marginal tax rate.

If this budget is passed, the capital gains tax inclusion rate is set to change. The federal government’s 2024 budget proposes a few modifications to how capital gains are taxed. Here’s a rundown of the changes:

• For all corporations and trusts, the capital gains tax inclusion rate will increase to 66.67% – up from 50%.

• For individuals with gains over $250,000, the capital gains tax inclusion rate will increase to 66.67% – up from 50%.

• For individuals with gains under $250,000, the capital gains tax inclusion rate will stay the same, 50%.

Who will the changes affect?

The adjustments will affect all corporations and trusts regardless of value, as well as individuals with capital gains of $250,000 or more.  

Capital gains tax does not apply to your primary residence, so you these changes could affect you if:

• You sell a secondary property – such as a cottage, rental or investment property – and earn more than $250,000 in profit from that sale.

• You sell investments for a value of $250,000 more than the original purchase price.

When will the changes take effect?

If adopted, the changes will take effect on June 25, 2024.

The federal government estimates that 28.5 million Canadians will not have any capital gains income next year, while three million others will fall below the $250,000 annual threshold, suggesting that these changes will not have an impact on the majority of Canadians.

If you believe they will affect you and your finances, it may be worth speaking with a qualified tax advisor and financial planner to learn strategies to reduce the impact of capital gains taxes and the proposed increased inclusion rate.

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