What is Capital Gains Tax?

The capital gains tax is the tax individuals pay when selling an asset or capital property. Capital gains are the profits from that sale. Common types of capital properties include cottages, securities (such as stocks, bonds and units of a mutual fund trust), land, buildings and equipment you use in a business or a rental operation, according to the Canada Revenue Agency’s website.

What’s Changing in 2024?

Starting June 25, 2024, Canada is implementing significant changes to its capital gains tax regime. The most notable change is the increase in the capital gains inclusion rate from one-half to two-thirds for gains exceeding $250,000 annually for individuals. This change also applies to corporations and most trusts, where the two-thirds inclusion rate will be standard for all capital gains.

These changes are part of an effort to create a fairer tax system by narrowing the gap between capital gains and other forms of income. Additionally, the new measures aim to incentivize investment in capital-intensive and high-growth sectors through initiatives like the Canadian Entrepreneurs’ Incentive. These changes will make Canada’s tax system fairer by making taxation more income-neutral—these changes narrow the tax advantage between capital gains and other forms of income, particularly paycheques.

What’s Not Changing?

  • The principal residence exemption remains, ensuring no capital gains tax on the sale of your home.
  • No option for tax elections or on-paper realizations without an actual property transfer.
  • Capital gains averaging over multiple years beyond the $250,000 annual threshold is not allowed.
  • Individuals cannot share their $250,000 annual threshold with corporations.
  • No exemptions for specific assets or corporations from the two-thirds inclusion rate.
  • No special rules based on asset holding duration or other criteria.

Impact on Homeowners and Investors

This tax change could have a significant impact on many Canadians, particularly those who own cottages, secondary residences, or rental properties. According to the CRA’s website, when you sell your home, you realize a capital gain. However, you’re exempt from paying tax on the gain if the property was solely your principal residence each year you owned it. The definition of a principal residence encompasses various types of dwellings, including houses, cottages, condos, apartments, trailers, mobile homes, or houseboats that individuals typically inhabit.

Aside from individuals who acquired second homes for leisure or supplementary income, those affected by the change may have bought these properties as part of their retirement strategy. It’s important to note that you can only designate one home as your principal residence per year.

John Fincham, a broker at Re/Max Parry Sound Muskoka Realty in Muskoka, Ontario, recently shared with BNN Bloomberg that this change could lead to a correction in the cottages and recreational property market. Some owners might rush to sell before the new tax rules take effect, especially considering the recent surge in property values.

Furthermore, this change could impact estate planning, as indicated by Fincham: “I am receiving numerous inquiries, mostly from individuals aiming to preserve their cottages within the family.”

Minimizing Capital Gains Tax

For individuals seeking to reduce their capital gains tax burden, several strategies can be employed:

1. Utilize Tax-Free or Tax-Sheltered Accounts: Consider leveraging Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP) to minimize tax liabilities on capital gains.

2. Explore Tax Loss Harvesting: Capital losses can be used to offset capital gains, reducing overall tax obligations. This strategy, known as tax loss harvesting, involves strategically selling assets at a loss to offset gains.

3. Track Investment Expenses: Keeping track of expenses related to investments, such as management fees or legal costs, can increase the adjusted cost basis (ACB) of assets, thereby reducing taxable gains.

As Canada prepares for these capital gains tax changes in 2024, taxpayers must stay informed and adapt their financial strategies accordingly. Understanding the nuances of capital gains tax and exploring effective tax planning strategies can help individuals and businesses navigate the evolving tax landscape with confidence.

 

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