Budget 2024 has brought many changes including some changes to capital gains tax in Canada. It’s important to keep up to date on these changes to prevent unexpected tax burden.
What is capital gain?
Capital gain is the difference between what you initially pay for an asset and what you earn from selling it later. This gain is subject to capital gains tax. In Canada, capital gains tax is not a separate filing but instead combined into your income tax filing. For example, if you have capital gains of $100,000 in a particular year, 50% of it will be considered for inclusion, which is $50,000. This $50,000 will then be added to your taxable income and would be taxed at your existing marginal tax rate. An important distinction to note is that a 50% inclusion rate does not mean you will pay 50% on your entire gain, just that 50% will be included as taxable income. Your actual final tax rate depends on many other factors, like your other forms of income, like your wages. Your applicable tax bracket is determined accordingly.
Key changes to capital gains tax in Canada
One of the most notable changes is the inclusion rate, which affects individuals, corporations, and trusts. The inclusion rate determines how much capital gain is taxable. These changes saw the inclusion rate increase from 50% to 66.67% and applies to gains realized after June 25, 2024.
For corporations and most trusts, this is applicable to all capital gains. However, for individuals, this rate only applies if the capital gains are higher than $250,000 in a year. Any amount lower than that in a single year, the rate remains unchanged at 50%.
Another change for middle-class business owners is the increase in the Lifetime Capital Gains Exemption (LCGE). The LCGE increased from $1 Million to $1.25 Million. As of 2026, it will change again to index with inflation. This helps reduce the effect on the middle class and is part of the government’s attempt to encourage investment and business entrepreneurship.
In the same vein, the new Canadian Entrepreneurs’ Incentive is expected to encourage investment in sectors that require large investments, but have the potential to be high growth.
The goal of these changes is to help make taxation more income-neutral.
Impact on Canadians
If an individual makes capital gains of more than $250,000 annually, they will face higher rates of taxation, and the inclusion rate increases from 50% to 66.67% of their capital gains. This tax is also applicable to most types of trusts and corporations, which means they will pay more tax overall. For these institutions, the new inclusion rate will be applicable on all capital gains, not just above $250k. Some companies may choose to invest differently due to this new development.
A business owner who intends to sell their business to fund retirement might have to modify their plans or restructure how they sell their business. They may also be able to take advantage of the Lifetime Capital Gains Exemption to reduce the tax they would pay from the sale of a business, which is likely to be a one-time gain of a large sum. This exemption helps ensure fair tax laws for those using this money as a retirement fund or lifetime savings.
Similarly, entrepreneurs may find it harder to find appropriate investment depending on the sector their business is in, since not all sectors qualify for incentives, like the Canadian Entrepreneurs’ Incentive.
Impact on inheritance and property
Most inheritances up to $250,000 will remain unchanged in terms of tax treatment. Larger inheritances that include a real estate or investment portfolio are subject to the increased inclusion rate. Primary residences are not affected, as before. Selling a secondary home, vacation home, or investment property will mean paying capital gains taxes on profit.
When inheriting the property, the same rules apply. Inherited primary residences are not subject to capital gains tax, but secondary homes are now subject to higher taxation. The only difference is that inherited primary residences will be taxed for capital gains on any change in value since the time of inheritance. Properties are typically automatically deemed inherited on the date of death. If the property increases in value between the time of inheritance and sale capital gains tax will apply. Capital gains tax laws only apply to the portion deemed an increase in value.
All this means is that estate planning may need some modifications to minimize the effects of capital gains tax.
Impact on low-income individuals
These changes to the capital gains tax in Canada have little, if any, impact on most low-income individuals. These changes only affect those with large gains over $250,000. Anything below remains at the unchanged 50% inclusion rate.
If someone is in a significant amount of debt, they may want to use their existing assets to pay off their debt. If the capital gains from the sale of the asset are sufficiently high, this tax may affect their plans. Higher taxation means less eventual proceeds in your pocket. When you’re trying to find strategies to get out of debt, these changes make a difference. People may change their debt strategies to combat this.
Overall, the capital gains policy change is more focused on high-income individuals and businesses. The government’s goal with these changes is to make tax more equitable. This is a step towards making the tax system fairer. It will narrow the gap between the tax advantages of capital gains compared to other forms of income, like salaries and wages.
Mitigating the impact
Tax-deferred accounts, such as TFSA and RRSP are not subject to capital gains tax. Investments made through these accounts will avoid the increased inclusion rate.
If you’re a business owner with small business corporation shares that qualify for exemption, you can use the Lifetime Capital Gains Exemption of $1.25 million.
If you’re an investor planning to sell your assets, spread out the sale over a few years if possible. For example, stagger the sale of stocks, mutual fund investments, or ETFs over a number of years, so as to stay below the $250,000 profit in a year. Since the capital gains are calculated on the price at purchase vs the price at sale, this will need to be factored into calculations before selling any assets. While this process may take longer to realize the gains, you will be saving a good chunk of change by selling it incrementally instead. This is particularly helpful if you don’t need the funds immediately.
If you have faced losses, they can be used to mitigate the impact of the inclusion rate as well. Capital gains can be offset by any capital losses incurred in the last 3 years. They can also be carried forward indefinitely. While filing taxes, you can determine and adjust the value of the net losses and carry them forward to a tax year where you need to offset these losses. The government website is a great resource that includes example calculations.
However, if you don’t qualify for any of these exemptions, there’s generally no way around it if you do have capital gains of more than $250,000 in a financial year. If you’re not sure whether you qualify, speak to a tax consultant for more information on your particular situation.
Key takeaways
The capital gains tax inclusion rate has increased from 50% to 66.67% for individuals earning more than $250,000 in capital gains in a single year. Below that amount, the inclusion rate remains unchanged at 50%.
Primary residences will be exempt from this tax, but not secondary homes or investment properties.
There are exemptions in place, like the Lifetime Capital Gains Exemption. Taxpayers also have the ability to carry forward net losses to offset capital gains and pay less tax.
These changes will mainly affect high earners. They’ll make their tax advantages more equitable compared to other kinds of income, like salaries.
If you want to sell assets to pay off debt, check to see if the new rate would apply. This may inform your choices and decisions, so do your research before selling any assets. Contact one of our trained credit counsellors for advice on what debt-relief option fits your specific situation.
