The 2024 federal budget introduces significant new spending initiatives and programs, funded in part by revenue generated from adjustments to the capital gains inclusion rate. But what does this entail, and how will it impact taxpayers? Here’s a breakdown:
Understanding Capital Gains: Capital gains represent the profit gained from the sale of an asset, calculated as the difference between its purchase price and selling price. Assets encompass various items such as cottages, investment properties, stocks, or mutual funds. For instance, selling a cottage bought at $750,000 for $850,000 results in a capital gain of $100,000.
Exemptions and Current Taxation: Certain scenarios exempt capital gains from taxation, such as selling a primary residence at a profit or earning gains through tax-sheltered avenues like RRSPs or RESPs.
Currently, only 50% of capital gains are taxable. For instance, if a cottage is sold for $100,000 more than its purchase price, only $50,000 of the profit is subject to tax.
Proposed Changes: The 2024 budget proposes increasing the “inclusion rate” from 50% to 66.67% on capital gains exceeding $250,000 for individuals. This means that for the first $250,000 in gains, taxation remains at 50%, while anything beyond incurs tax on two-thirds of the profit. Corporations and trusts would also face this two-thirds tax rate on all capital gains.
These changes are slated to take effect on June 25.
Rationale Behind the $250,000 Threshold: Government data indicates that a vast majority of Canadians won’t be affected, as they either don’t have capital gains income or fall below the $250,000 threshold. Only a small fraction, roughly 0.13% of Canadians with an average income of $1.4 million annually, are projected to see increased personal income tax on their capital gains due to these adjustments.
Impact on Property Sales: The budget maintains exemptions for principal residence sales and extends the lifetime capital gains tax exemption on small business shares, farming, and fishing properties. This exemption is proposed to rise to $1.25 million, with subsequent adjustments for inflation.
However, individuals who receive gifted or inherited properties and subsequently sell them may face higher capital gains tax rates, depending on factors like profit size and property usage.
