Capital gains taxes apply when you make profit on the sale of an asset, such as real estate which is not your principal residence, investments such as shares or funds, or shares of an operating business corporation. Recently, the Canadian federal government announced changes to capital gains rules, effective from June 25, 2024. Under the new regulations, individuals with significant capital gains per year will face an additional tax rate. For investors and shareholders, this means that sales of their assets will be subject to the revised rates.
Prior to June 25, 2024, all gains realized during tax year were subject to the 50% inclusion rate. On or after June 25, the inclusion rate of 50% still applies to the first $250,000 of capital gains. Only any excess gains above $250,000 that were realized after June 25 would be subject to the new 66.67% rate.
There are two ways to lessen the effect of the new capital gain rules:
Investments such as Shares/Funds: Given the tight timeline to implement planning, individual taxpayers should review their taxable investment portfolios to determine if their current unrealized gains would be difficult to manage below the $250,000 threshold every tax year until death. Individuals with accrued gains in the millions should consider selling their highest gain assets before June 24, 2024 and repurchasing (if desired) to crystallize the gain at the lower 50% inclusion rate. This is especially important if investors were already intending to rebalance a large portfolio or planning to trigger some market gains anyway.
Real Estate: Individuals planning to sell real estate that is not eligible for the full principal residence exemption should also consider closing the sale before June 25, 2024 to avoid the higher inclusion rate. Non-resident individuals who own Canadian real estate should also consider that they will be affected by higher capital gains taxes upon sale of their properties.
While the pros and cons of accelerating the realization of capital gains and other relevant tax rules would need to be taken into account, planning for all taxpayers (including corporations, partnerships, trusts and individuals) to accelerate the realization of capital gains before June 25, 2024 may be appropriate in the following situations, among others:
Shares of an Operating Business Corporation: Taxpayers that own shares of a corporation that carries on a business which have appreciated in value where a sale of those shares in the future is a likely scenario.
Taxpayers who are currently in the process of selling a capital asset such as business equipment, stocks, or undertaking a corporate reorganization/estate freeze may consider accelerating the timeline of their transactions to close before June 25, 2024. Business owners considering an intergenerational transfer of their business under the rules introduced by Bill C-208 may want to consider closing before June 25, 2024.
Let's look at two examples with similar assumptions except for the date of sale of the asset:
Example 1: John and Mary purchased their cottage in Muskoka, Ontario, in 1985 for $100,000. The cottage is not their principal residence. On July 1, 2024, John and Mary sold their cottage for $600,000. Calculate the capital gains.
To calculate the capital gains, we will find the difference between the selling price and the purchase price:
| Capital Gains=Selling Price Purchase Price = | $600,000 - $100,000=$500,000 |
| Capital gains inclusion amount on the first $250,000 = | $250,000x50%=$125,000 |
| Capital gains inclusion in excess of $250,000 = | $250,000x66.67%=$166,675 |
| Total capital gains inclusion amount = | $291,675 |
Example 2: Same assumption as example 1 except date of sale is June 1, 2024.
Since the sale occurred prior to June 25 effective date, Capital gains inclusion amount on the first $250,000 does not apply and the entire capital gains amount is subject to the 50% inclusion rate.
| Capital Gains=Selling Price Purchase Price = | $600,000 - $100,000=$500,000 |
| Capital gains inclusion = | $500,000x50% |
| Total capital gains inclusion amount = | $250,000 |
It's important to note that the sale of a primary residence (the home lived in by the seller) remains sheltered from capital gains tax, but cottage sales fall under the updated rules.
As you can see from the above examples, if you are planning to sell your asset(s) with significant accrued gains, it is advisable to partially shield the effects of the new rule either by selling the asset or by crystallization before the implementation of the revised rule.
For further information please contact Taxtron Support at 416-491-0333 or visit www.taxtron.ca
Posted on 23 May 2024