The tax regime of Canada in 2024 is in a state of transition, and one of the fundamental changes is the raising of the capital gains inclusion rate. These changes will impact your taxes and, by extension, your wealth and investment management plans if you are an investor, businessman, or someone who intends to sell valuable properties.
This is a comprehensive breakdown of what to expect from Canada’s capital gains tax changes, how they will impact the taxpayers in 2024 and 2025, and what you should do to prepare before the new rules are implemented.
What Are Capital Gains?
Capital gain is the profit that results from the sale of an asset or investment at a higher price than the original purchase price. For instance, assuming you bought stock at $1,000 and later sold it at $1,500, the $500 increase is your capital gain. On the other hand, if an asset is sold at a price below its cost, then it leads to a capital loss.
Capital gains and losses can be realized from a wide range of investments, including stocks, bonds, mutual funds, ETFs, rental properties, cottages, and business assets. Automobiles, boats, furniture, and other items utilized for private purposes are all considered personal-use property. For tax reasons, it also contains Listed Personal Property (LPP), which is dealt with a little differently than other personal property. The gains can also be from selling collectibles, which are considered personal property and include antique coins, classic cars, alcoholic beverages, etc. The same rule applies to your primary home if it meets the requirements set by the Canadian tax laws under the principal residence exemption.
How Is Capital Gains Taxed in Canada?
Capital gains are different from other sources of income such as dividends or employment income because they depend on the inclusion rate which is the fraction of the gain included in the computation of the income. Here’s a breakdown of the recent updates to Canada’s capital gains inclusion rate:
- Specifically, as of June 25, 2024, the inclusion rate was 50% for gains not exceeding $250,000 and 66.67% for gains over $250,000.
- The inclusion rate for corporations and trusts has been standardized at 66.67% for all capital gains.
The portion of your gain that is taxable is computed and added to your total income and then taxed at federal and provincial/territorial rates. Although the tax on gains up to $250,000 is limited to 27.4%, higher gains of high-income earners are subjected to a higher percentage of 36.5% due to the progressive tax system in Canada.
Understanding How CGT Calculation Works
Suppose you invested in a particular share and paid $5,000 for it, including a $100 brokerage charge. Later on, you sold those shares for $10,000 but incurred a selling commission of $150. Here’s how to calculate your capital gain:
| Proceeds of Disposition | $10,000 – $150 = $9,850 |
| Adjusted Cost Base (ACB) | $5,000 + $100 = $5,100 |
| Capital Gain | $9,850 – $5,100 = $4,750 |
With the new inclusion rate, if this gain is less than $250,000, 50% of it ($2,375) will be added to your taxable income.
How the Capital Gains Changes Will Affect Your Planning
The updates in formulating the capital gains inclusion rate of Canada in 2024 present opportunities as well as risks for investors and those who possess properties. Here’s a detailed look at how these changes will impact your financial planning and some strategic adjustments you might want to consider:
1. Higher taxable inclusion rate for Higher Gains
- What Changed: It is noted that from June 2024, the amount of capital gains and profits over and above $ 250,000 was subjected to an inclusion rate of 66.67% from the previous 50%.
- Planning Implications: Where you expected to make large gains such as from the sale of a valuable investment property, these are now subject to a greater degree of taxation. Thus, the tax increase targets individuals with high incomes or those who sell stocks that they have held for years.
- Consideration: Be prudent when considering the transactions that take you to the next level of taxation if they exceed $250,000. It may be necessary to distribute the sales of assets over different years or consider if it is better to retain the assets and use them to execute other strategies.
2. Timing Your Asset Sales
- What Changed: The split inclusion rate could lead to different selling approaches based on the asset size.
- Planning Implications: However, for other assets where gains may go over $250,000, timing becomes critical. Selling assets in smaller portions may be useful in escaping the higher 66.67% inclusion rate and paying less tax.
- Consideration: Gradual or phased sales could also be useful to ensure that gains achieved do not exceed the threshold. Further, examine any investment account possibilities (for instance RRSP or TFSA) where the yield can be tax-advantaged.
3. Balancing Gains with Capital Losses
- What Changed: This is because the increased inclusion rate enhances the significance of offsetting gains with losses.
- Planning Implications: Another advantage of capital losses is that they can be offset against other gains to minimize the amount of tax payable. The more significant the inclusion rate, the higher the value of these losses.
- Consideration: Regarding this opportunity, it is recommended to employ tax-loss harvesting, particularly if it’s a high-gain year. Expenditures can be set off against income for three previous years or future years, so maintain records for such a purpose.
4. Making the Most Out of Tax-Advantaged Contributions
- What Changed: Although the inclusion rate change does not affect registered accounts such as RRSPs, TFSAs, FHSAs, and RESPs, they are still very beneficial.
- Planning Implications: Funds deposited in these accounts are not subjected to capital gains tax until they are withdrawn (in the case of RRSPs) or are not taxed at all (in the case of TFSAs), protecting you from the new inclusion rate.
- Consideration: To achieve tax-sheltered development, focus on investing the development-oriented investments in these accounts to exclude the gains fully from the inclusion rate hikes. It is also important to note that RRSPs and RESPs may also have tax advantages when they are withdrawn under certain circumstances.
5. Donating Assets
- What Changed: Donations of appreciated securities directly to charities are still free from capital gains tax.
- Planning Implications: This strategy becomes even more appealing if you are anticipating high gains since the donations reduce the capital gains tax on transferred securities.
- Consideration: Donating securities such as stocks, ETFs, or mutual funds to charity enables one to avoid the new 66.67% inclusion rate while giving back. You will also get an acknowledgment of the donation for tax purposes and may even be able to offset the cost of the donation against your overall taxable income.
Financial Future Amid Tax Reform
Currently, the capital gains tax is set to undergo significant reforms in Canada in 2024, and therefore, it is about time to evaluate your finances and reflect on how the new capital gains inclusion rates will impact you. The elimination of deductions and the increase in tax rates on gains over $250,000 is a major shift for investors, business owners, and anyone selling high-value assets.
Therefore, it is advisable to seek the services of tax consultants and plan your investments before the new laws take effect to ensure you get all the useful strategies. At Clearweath, our team of experienced and professional accountants offers a variety of services that may include but are not limited to bookkeeping, tax consulting, financial statement analysis and preparation, and budgeting services among others. In our work, we focus on quality, precision, and speed to ensure that your records are accurate and meet all relevant legal requirements.
Contact Clearweath today at (437) 290-5117
email us at info@clearwealth.tax and let our experts take care of the numbers!
