Canada’s 2024 budget alters capital gains tax to make the system fairer and fund housing affordability measures. For gains over $250,000 annually, the inclusion rate rises from 50% to 66.67%; below that, it remains at 50%.
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Canada Capital Gains Tax 2024
Canada’s 2024 budget introduces significant changes to capital gains taxation, aiming to create a fairer tax system and generate revenue for housing affordability measures.
The proposed changes will increase the inclusion rate for capital gains realised annually above $250,000 for individuals from 50% to 66.67%, while gains under that bar will continue to be taxed at the 50% rate.
Starting June 25, 2024, all capital gains from corporations and trusts will be affected by this change, regardless of the $250,000 threshold. It’ll increase the tax burden on the wealthiest Canadians.
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Changes to the Canada Capital Gains Tax in 2024
The Canadian government introduced changes to the capital gains inclusion rate as part of the 2024 federal budget.
Previously:
- A flat inclusion rate of 50% applied. This means only half of your capital gain was included in your income for tax purposes.
New Rules (Effective June 25, 2024):
- Tiered Inclusion Rate for Individuals:
- Capital Gains up to $250,000: The inclusion rate remains at 50%. You’ll still only pay tax on half of the profit earned.
- Capital Gains Exceeding $250,000: The inclusion rate increases to 66.7%. This means a higher portion (two-thirds) of your profit is included in your income for tax purposes.
- Corporations and Trusts: The inclusion rate for all capital gains realised by corporations and trusts goes up to 66.7% from the previous 50%.
- This change only impacts individuals with significant capital gains exceeding $250,000 annually.
- The increased inclusion rate aims to make the tax system fairer by ensuring those with higher capital gains pay a larger share of taxes.
- The principal residence exemption remains in place. You won’t pay capital gains tax on profits from selling your primary home.
- The lifetime capital gains exemption has been increased to $1.25 million, offering tax-free treatment on a portion of gains from qualified small business shares and certain types of property.
Who Will Be Affected by the Changes to Canada’s Capital Gains Tax Rate (2024)?
The 2024 federal budget introduced a tiered capital gains inclusion rate, but its impact won’t be evenly distributed:
Limited Impact for Most Canadians:
- Low and Middle-Income Earners: The vast majority of Canadians (estimated at 99.87%) won’t see any changes to their personal income taxes on capital gains.
- Homeowners: The principal residence exemption remains unchanged. Selling your primary residence won’t trigger capital gains taxes regardless of the profit earned.
Increased Tax Burden for:
- High-Income Earners with Significant Capital Gains: Individuals who realise capital gains exceeding $250,000 in a year will face a higher tax bill due to the increased inclusion rate of 66.7% on the portion above the threshold. This could include:
- Investors with substantial investment portfolios.
- Business owners selling successful businesses for a profit.
- Real estate investors who flip properties or sell secondary properties for a large gain.
Potential Impact on:
- Small Businesses:
- The increased inclusion rate for corporations and trusts could affect some small businesses, particularly those with significant capital gains from asset sales.
- However, the Canadian Entrepreneurs’ Incentive (CEI) offers a potential offset by providing a reduced inclusion rate for qualified small business share sales.
- The impact on any individual will depend on their specific financial situation and overall tax profile.
- The increased lifetime capital gains exemption ($1.25 million) offers some relief by allowing tax-free treatment on a portion of gains from qualified small business shares and certain types of property.
Exceptions and Offsets to Canada’s Capital Gains Tax (2024)
The 2024 federal budget introduced a tiered capital gains inclusion rate, but there are exceptions and offsetting measures to consider that can potentially reduce your tax liability.
Exceptions:
- Principal Residence Exemption: This remains unchanged. Selling your principal residence is exempt from capital gains tax, regardless of the profit earned.
Offsets:
- Lifetime Capital Gains Exemption (LCGE): The LCGE has been increased to $1.25 million from $1,016,836. This allows you to claim a tax-free amount on the sale of qualified small business corporation shares and qualified farm or fishing property.
- Canadian Entrepreneurs’ Incentive (CEI): This new program offers a significant offset for some individuals.
- It provides a reduced inclusion rate of 33.3% on a lifetime maximum of $2 million in eligible capital gains from qualified small business share sales.
- Capital Losses: Capital losses from previous years can be used to offset current year capital gains, potentially reducing your taxable capital gain and lowering your tax bill.
- RRSPs and TFSAs: Investing in Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) allows your capital gains to grow tax-free.
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