Clearing Up The Confusion Around Capital Gains Tax

With the vote on the new capital gains tax measures having been passed by the House of Commons, the proposed changes are officially set to take effect as of June 25th. As with any proposed increase to taxes, there has been a lot of backlash, much of which is the result of lack of understanding of both how capital gain taxes work as well as what the proposed changes actually are.

Recent polling by Angus Reid found that nearly 25% of respondents expected to pay either a little more or a lot more in taxes over the next five years due to the changes, which is a massive difference from the 0.13% of Canadians the federal government claims will be affected this year. While there likely are going to be many Canadians that are not in the top 0.13% of income earners that will end up paying higher taxes under the new rules 1 , it is quite unlikely that nearly one in four Canadians will actually be affected. To help get a better understanding of if these changes will affect you or not, let’s review how capital gains are taxed and what the new changes to the rules are. https://angusreid.org/federal-politics-capital-gains-inclusion

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What is a capital gain, and are the taxes on my paycheque going up?

A capital gain is very simply the increase in value between what you bought something for and what you sold it for, whether that “something” is a company’s stock, a family cottage, or a business. The proposed changes are very specific to only apply to capital gains, and not employment income, interest income, or income from RRSP/RRIF withdrawals.

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Is the tax rate going up to 67%?

This is probably one of the most common misconceptions, as people confuse the capital gains “inclusion rate” for the actual tax rate they have to pay on capital gains. Currently, you must include 50% of a capital gain in your taxable income. This is referred to as the Capital Gains Inclusion Rate, and it is what is being increased to 67% in certain circumstances. For example, if you bought $10,000 worth of a stock (in a non-registered account) then later sold it all for $20,000, you would have a $10,000 capital gain and would have to pay taxes (at your marginal tax rate) on $5,000 of that capital gain. The final tax rate you pay on that income is determined by the rest of your income and the province you reside in.

Who will the higher capital gains inclusion rate apply to?

Starting with individuals, the inclusion rate will stay at 50% for up to $250,000 in capital gains per year, then increases to a 66.7% inclusion rate for capital gains above $250,000 annually.

Corporations and most types of trusts will not have the same exemption for the first $250,000 in capital gains, and will be subject to a 66.7% inclusion rate on ALL capital gains on investments and/or property held within the corporation or trust.

For small business owners selling a business, or a farmer selling farmland, they have a special Lifetime Capital Gains Exemption which had been slightly more than $1 million, that will be increased to $1.25 million in  2025 (and adjusted annually for inflation starting in 2026). Depending on when the business or farm is sold and how much the capital gain is, the new changes could either be beneficial or detrimental compared to the previous tax structure. For a more in-depth dive into corporate/farmland capital gains, refer to this informative article from CFIB: https://www.cfib-fcei.ca/site/capital-gains .

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Will I have to pay capital gains when I sell my house?

Capital gains taxes also do not apply to the sale of a person’s principal residence in Canada, so you do not have to worry about paying more taxes if you are thinking of selling your house and it has significantly appreciated in value over the years. However, selling a family cottage or rental property is not exempt from capital gains taxes, and the new changes could result in you paying more taxes if the capital gains on the sale are more than $250,000.

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Will this affect you?

The final legislation still remains to be released, and the Liberal government will be updating draft legislation that adds further technical changes by the end of July 2024. So, for a few specific situations, we still need to wait for more details to see the real-world impact of these changes. Aside from that, the amount of people impacted by these changes are likely going to be higher than the top 0.13% of income earners in Canada, but probably also far less than the nearly 25% of survey respondents that expected to be paying higher taxes over the next five years as a result of the changes. Unfortunately, the window to sell an asset before the changes to capital gains taxes were implemented was small and has now passed, so hopefully you are among the majority of Canadians that shouldn’t be affected by the new changes.

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Disclaimer: This information has been prepared by Dennis Rubeniuk, who is an Investment Advisor for iA Private Wealth Inc. Opinions expressed in this article are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization

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