Capital gains taxation in Canada has undergone significant changes as part of the 2024 federal budget, reshaping the landscape for investors and businesses alike. Historically, when you reported capital gains, half of the amount was included in taxable income, but with the new rules introduced in June 2024, this rate has increased to two-thirds for gains exceeding $250,000 per year. This represents a substantial 17% increase in taxation on capital gains for many Canadian businesses and individuals. Understanding these changes, their implications, and how to navigate them is crucial for anyone with sizable investments. Read on to learn more about these changes, what has remained the same, and how to prepare for the impacts on your financial planning.
What are Capital Gains?
Capital gains are when an individual or business sells a capital asset for more than what was originally paid. Capital assets could be stocks, bonds, real estate, or business interests. The difference between the selling price and the purchase price (adjusted for improvements and certain expenses) is considered a capital gain.
There are two types of capital gains:
- Realized Capital Gains: These occur when an asset is sold or disposed of, and the gain is locked in. For example, selling shares of stock for more than their purchase price results in a realized capital gain.
- Unrealized Capital Gains: These are gains on assets that have increased in value but have not yet been sold. You won’t be taxed on unrealized gains unless you sell the asset.
Capital gains are a significant source of income for investors and businesses, contributing to wealth accumulation. However, with this income comes the responsibility of taxation, which has now become a focal point of fiscal policy in Canada.
What Hasn’t Changed with Capital Gains Taxes
Despite the changes introduced in 2024, several key aspects of the capital gains tax regime remain unchanged. These continuities provide some stability and predictability for taxpayers, even as the broader landscape evolves.
1. Primary residence sales are exempt from capital gains taxes
One of the most significant protections for Canadian homeowners is the principal residence exemption. This rule ensures that any capital gain realized from the sale of a taxpayer’s primary residence remains tax-free. This provision is crucial for protecting homeowners from paying taxes on the appreciation of their home values, which could otherwise significantly impact those selling a home, especially in high-cost housing markets.
2. A legal transfer of assets is required for capital gains to be realized
For a capital gain to be realized, a legal transfer of the property must occur. This means that taxpayers cannot simply elect to recognize gains or losses on an asset without an actual sale and transfer of the assets. The tax rules maintain that capital gains taxation is triggered only by a genuine transaction.
3. Capital gains are per-year and cannot be averaged
Capital gains cannot be averaged over multiple years to keep within the annual threshold of $250,000 for the one half taxation rule. Taxpayers are not allowed to spread the gains over several years to reduce their taxable amount if they receive a larger, one time capital gain.
4. Individuals cannot split capital gains between their personal taxes and corporations they own.
The $250,000 annual threshold is strictly for the owner of the asset (either an individual or a corporation) and cannot be split or shared between individuals and corporations they own.
5. Every corporation and asset is included within capital gains taxation
The two-thirds inclusion rate above $250,000 applies uniformly across all sectors, with no exemptions for specific assets, industries, or types of corporations. This change means all capital gains are taxed equally without special exclusions or benefits for certain assets (other than primary residences, mentioned above).
6. Capital gains are the same, no matter how long the asset has been held.
There are no new rules providing different tax treatment based on how long an asset is held. Whether an asset is held for a day or decades, the inclusion rate remains the same.
What Has Changed with Capital Gains Taxes
The most notable change under the new capital gains tax rules is the increased inclusion rate for large gains:
Increased Inclusion Rate for Gains Over $250,000
Capital gains exceeding $250,000 per year are now taxed at two-thirds, up from the previous half. This change affects both personal and corporate capital gains, significantly increasing the taxable portion of high-value gains. For example, if an individual realizes $300,000 in capital gains, the additional $50,000 over the $250,000 threshold would be taxed at the new higher rate, leading to a higher overall tax liability.
Net Capital Losses
Unlike capital gains, capital losses can be used to offset capital gains up to three years previously and forward. For example, if you have a capital loss of $300,000 in 2023, and a capital gain of $350,000 in 2024, you would only need to pay capital gains tax of one half of $50,000 instead of one half of $250,000 and two thirds of $100,000.
These changes are designed to increase government revenue from investment income, particularly from those with significant investment portfolios.
What You Need to Do
With the new rules in place, it’s important to be proactive in managing your capital gains and preparing for the potential tax impacts:
1. Review and Adjust Your Investment Strategy
Take a close look at your investment portfolio and identify any assets that might result in significant capital gains. Consider strategies like tax-loss harvesting (selling losing investments to offset gains) or deferring the sale of high-gain assets to future years if possible.
2. Plan for Increased Tax Liabilities
If you anticipate capital gains exceeding $250,000, start planning for the increased tax liability now. This might involve setting aside funds to cover the potentially higher tax bill or adjusting your financial plans to accommodate the additional costs.
3. Consult with a Chartered Professional Accountant (CPA)
A CPA can provide valuable advice on navigating the new tax landscape. They can help you understand the specific impacts on your financial situation, identify strategies to minimize your tax burden, and ensure that you comply with the new rules.
How Gallo LLP Can Help
Navigating the complexities of capital gains tax changes can be challenging, but you don’t have to do it alone. At Gallo LLP, our experienced team of accountants and tax professionals is ready to help you understand your capital gains, provide personalized advice on tax planning, and offer comprehensive services to minimize your tax liability.
Our approach includes:
- Comprehensive Capital Gains Analysis: We’ll assess your current and future capital gains and net capital losses to identify potential tax impacts and opportunities for optimization.
- Strategic Tax Planning: We’ll work with you to develop strategies tailored to your financial goals, whether that involves deferring gains, offsetting gains with necessary losses, or exploring other tax-saving opportunities.
- Professional Guidance and Support: From preparing your tax returns to advising on investment strategies, Gallo LLP provides the experience and support you need to navigate these changes with confidence.
Contact us today to learn more about how Gallo LLP can help you manage your capital gains taxes and achieve your financial goals in light of the new rules.