The Federal Budget and Capital Gains
Hello All,
The federal budget that was released on April 17, 2024 was controversial, to say the least. For years, finance people have been hypothesizing about an increase to the capital gains “inclusion” rate. This budget finally made good on that speculation and was perhaps the most significant provision of this budget.
A capital gain occurs when you sell an asset for a higher price than what you paid for it. Of the gain that you realize i.e. the difference between the sale price and the purchase price, currently only 50% of the gain is “included” and is taxable.
For example, lets say you purchased a cottage (not your principal residence which is not taxable) for $100,000 and sold it for $500,000, under the current rules, only $200,000 (50%) of the $400,000 gain would be subject to tax and added to income. The actual tax payable is then based on your marginal tax rate for the year in which the sale took place. So if your tax rate was 45%, then you would pay 45% of $200,000= $90,000 on a total gain of $400,000 .
With the proposed tax changes, the inclusion rate for capital gains, that exceed $250k, for individuals has increased to 66.67%. In the example above the taxes payable would be:
$250,000 X 50% +
$150,000 X 66.67%
= $225,050 Capital Gain
Tax Rate = 45%
Taxes payable = $101,272
The increase in taxes therefore, under the new rules, would be $101,272 - $90,000 = $11,272.
This is going to significantly impact individuals with vacation and rental properties whose values have increased over time. Additionally it will impact those with non registered investment as well as people who leave Canada and people who die for which there is a deemed disposition of investments. Some have viewed these holdings as one of the ways in which they are going to fund their retirement. This new tax will now have to be factored in.
The second part of the budget proposes to increase the inclusion rate of ALL capital gains held in a corporation or trust to 66.67%. This means that if you have investments or real estate in a corporation for the myriad of legal or structural reasons that people choose this type of structure (the tax benefits for the most part are minimal), you are being penalized . This is somewhat incomprehensible and violates the principle of tax integration - the goal of any fair tax policy is that “removes the differences in tax payable because of a choice in business or income earning structure”.
The proposed date for implementation of these rules is June 25th, 2024. Consequently, accountants and lawyers are going to be slammed with affected individuals and owners of corporations/trusts trying to figure out their best course of action which might be to either sell their holdings or simply move out of Canada.
For more on the budget including opinions and specific provisions, see links in tax section below.
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Relevant Resources
I have updated a couple of posts including one on investment income (which includes info on capital gains) and another one on the T2125 which has to be prepared by anyone with an unincorporated business.
How to Reflect Investment Income and Capital Gains/Losses on your Personal Tax Return
Residents of Canada are required to reflect all sources of worldwide income on their personal tax returns. For most individuals, who have investments with Canadian based banks and brokerages, this is
How to Prepare the T2125 if you are a Small or Self Employed Business Owner
While being self employed comes with numerous benefits, there are also many challenges. One of them is ensuring that you are aware of, and fulfill, your tax obligations on a timely basis. In the begin
My latest video shows you how to file your GST-QST return using Revenue Quebec’s my account for business (or Clic Sequr).
If you are located in any other part of Canada, you would file your GST/HST return though CRA My business account.
