With notes from Penelope Graham
When you sell an asset like a rental property or some investment products like stocks and you make a profit, capital gains taxes apply. The federal government announced changes to the rules in the April 2024 Federal Budget that will go into effect starting June 25, 2024. Here’s what you need to know about the changes to Canadian capital gains tax rules for 2024 and whether they could apply to you.
Changes to Canadian capital gains tax for 2024 explained
The new capital gains tax inclusion rate
Capital gains tax currently applies to the profit you make when you sell an asset for more than it cost you to buy (this cost is called the ACB or adjusted cost base plus expenses). The tax was previously applied to a maximum of 50% of the profit resulting from the sale of assets like investments (stocks, ETFs, mutual funds) and property like rental properties and cottages.
On April 16, 2024, the federal government announced a new capital gains tax inclusion rate, which is:
- Individuals with more than $250,000 in capital gains per year will be subject to an additional 66.67% (two-thirds) capital gains tax rate. In this case, the first $250,000 in capital gains will be subject to the existing 50% capital gains tax rate, and the remainder will be subject to the new two-thirds inclusion rate.
Changes will apply to capital gains (profits on assets sold) occurring on or after June 25, 2024.
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Capital gains tax on investment income
Canadian capital gains tax applies to investments held in certain accounts. There are ways to avoid capital gains taxes on profits made in your investment portfolios.
When you realize capital gains on investments in the following accounts, you are are exempt from capital gains taxes:
- TFSAs: TFSAs are tax-free, meaning withdrawals are not taxed. There are some taxes that apply to dividend income from U.S. investments, though. Using a TFSA for your investments can help you avoid capital gains tax. Just be sure to stick to your annual TFSA contribution limit to avoid penalty.
- RRSPs: Profits made on RRSP investments are not subject to capital gains tax. If you withdraw from your Registered Retirement Savings Plan (RRSP), you won’t be taxed on your capital gain, but you will be taxed at your marginal income rate. Also, if you convert your RRSP to an RRIF upon retirement, your gains will not be subject to capital gains tax, but instead, the RRIF payments will be considered ordinary taxable income.
- FHSAs: Contributions made to the First Home Savings Account (up to $8,000 per year, and lifetime maximum of $40,000) are not taxed when withdrawn from the account for the purpose of buying a first home. Returns and income earned on any investments housed within the FHSA are also sheltered from capital gains.
- Registered pension plans: Capital gains within registered pension plans such as the CPP/QPP will still be tax-free.
Capital gains tax does apply to investment income in other cases, though, such as when you sell stocks held in non-registered investment accounts or if you are day trading. The new capital gains tax inclusion rate will apply to profits made on investments, like when you sell stocks held in non-registered accounts - if you have more than $250,000 in total capital gains in a year.
Keep a record of any fees you pay for buying or selling stocks or securities, like brokerage fees, commissions or management expense ratios (MER). You will need to use this to calculate your expenses in the capital gains formula, and potentially reduce your capital gains.
Capital gains tax on real estate
One of the most-impacted groups of the new capital gains tax inclusion rate are small-scale real estate investors, such as those who have a second property for rental purposes, or a recreational home, like a cottage.
While the sale of a primary residence (the home lived in by the seller) is always 100% sheltered from capital gains tax, rental unit and cottage sales will be subject to the original capital gains rate of 50% on the first $250,000 of profit, and at 66.7% on the remaining amount.
How to calculate capital gains on the sale of an investment property:
For example, let’s say a cottage owner originally purchased their property 20 years ago for $250,000, but sells it this summer (after the new rate takes effect) for $750,000, meaning they’ve made a profit of $500,000.
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Let’s break down what their capital gains tax bill would look like, using the following formula:
Proceeds of disposition – (ACB + Expenses) = Capital Gains
What do these terms mean?
- Proceeds of disposition: This refers to the sale price of the property. In our example, this amount is $750,000.
- Adjusted cost base (ACB): In the context of real estate, the ACB refers to the original price you paid for the property, in addition to other costs paid during the purchasing process (such as legal fees and closing costs). The ACB also includes the cost of any improvements you made to the property, (such as renovations) that have contributed to its current value. For our example, let’s assume our investor paid $1,000 in lawyer fees when buying the property, and then spent $50,000 building an extension on it at some point in the following years.
- Expenses: These refer to any money spent specifically to prepare and sell the property. This can include anything from repairs, staging and marketing the property for showings, to commissions and fees paid to real estate brokers. It also includes closing costs such as legal fees. For our example, let’s say our selling expenses total $2,000.
Based on these amounts, our capital gains formula looks like the following:
$750,000 - ($250,000+1,000+$50,000+2,000)= $447,000
$447,000 is the capital gains amount you will now be taxed on.
Now, we apply the tax inclusion rate as following:
- 0.50% for the first $250,000
- 66.7% for the remaining $197,000
$250,000 x 0.5 = $125,000
+
$197,000 x 0.667 = $131,399
=$256,399
$256,399 is the amount you must add to your income when filing your taxes, which is then taxed at your marginal tax rate.
However, if the property is being sold by a corporation or trust, the new capital gains tax rate of 66.7% is then applied for all capital gains. Using the same scenario as above, this would result in a taxable income gain of $298,149 ($447,000 x 0.667%).
Capital gains exemption rules
A lifetime capital gains exemption applies to profits made from selling the shares of a small business, as well as from certain other businesses like farms. If you sell your principal residence, the sale is also exempt from capital gains taxes- but certain conditions apply.
The bottom line
Canadian capital gains taxes could apply to you if you are selling an investment asset. There are ways to reduce or avoid capital gains taxes, though, so it’s important to educate yourself on all of the options available to you.
Also read:
- How will the 2024 Federal Budget impact mortgage borrowers?
- The 2024 federal budget and bank fees
- Federal government introduces 30-year amortizations for some insured borrowers
