2024 Budget: Capital Gains for Individuals
- Alexander Philipp
- Jun 26, 2024
- 3 min read
Now that the government is implementing new Budget 2024 rules, there are a few changes to the Federal Budget that Canadians will want to be aware of. The Capital Gains inclusion rate has changed for trusts and corporations. The proposed capital gains inclusion rate is increasing from 1/2 to 2/3 on capital gains for trusts and corporations. For individuals, any capital gain in excess of $250,000 CAD, will be subject to the 2/3 inclusion rate. For the purpose of this post, I will focus on the effects to individuals.
The current inclusion rate is 1/2 or 50%. Meaning, if a person sells an asset for $1,500,000 their reported capital gain is $1,000,000. What is taxable on the capital gain is dependent on the province one lives in, and earned income. For this example let us assume an Albertan pays taxes on the $500,000 at a rate of 40%. Their taxes owed for this capital gain would be $200,000.
What the Budget 2024 has proposed is another tier in the inclusion rates. For individuals, the rate increase will now be 2/3 or 66.67% of capital gains over the $250,000 limit. Looking at our previous example let's assume the individual has a capital gain of $1,000,000. Their taxable capital gain under the old rules would be $500,000. Beginning June 26th, the 2 tiered inclusion rates for individuals will apply. Below let's have a look at a simple scenario under the old vs new rules.
So, what does this mean for our Albertan?
The first $250,000 will be under the old inclusion rate of 50% = $125,000
The second $250,000 taxable gain will be under the 2/3rds inclusion rate = $166,667
Under the old inclusion rates, our Albertan would be responsible for a taxable capital gain (50% of $1,000,000) $500,000 @ 40% MTR = $200,000 as shown above.
Under the new 2 tiered system, our Albertan would be responsible for a taxable capital gain of ($250,000 Tier 1 + $333,333 Tier 2) = $583,333 @ 40% = $233,333 taxes owed.
Under the new rules, our Albertan at a Marginal Tax Rate of 40%, would have taxes owed of $200,000. Comparing our two examples our Albertan now owes $33,333 more in taxes.
There are planning tools that can be implemented in the correct situations. It should be noted nothing has changed to the principal residence exemption. However, if an individual is wanting to sell a cottage or secondary residence. It may be wise to employ a Financial Planner and Accountant to see what can be done to smooth this gain.
When might this apply?
Keep in mind that a Canadian's total capital gains for the year are considered. If there is a sell in a non-registered account coupled with the sale of a secondary property; these two individual capital gains will be combined for taxation reporting. One single event may not impact a Canadian. It is important to understand what the sale of an asset might do to cumulative capital gains.
For those wanting to transfer property from one generation to the next, this new change may be important. There are ways to spread the capital gain over a few years in the correct scenario. In essence, if are planning on crystallizing a capital gain moving forward in Canada, an individual should inquire about potential new taxes owed on the transaction.
Alexander Philipp BA CFP
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