At isure, we understand that taxes can be difficult to understand for people who are just getting started. Income taxes, property taxes, and sales taxes are some of the most common types you’ll see. However, we also have the capital gains tax, which is generally paid on any gains when you sell an investment. In the federal government’s April 2024 budget, we will also see some changes in how capital gains taxes work and affect Canadians. These new budget changes include significant spending on multiple projects and programs. To help pay for this, they are relying on revenue from a change to the capital gains inclusion rate.
So, how do these work? What is the point? What are capital gains to begin with? How does this inclusion rate affect taxpayers? We’ve done the research regarding everything you need to know about capital gains taxes.
What is the capital gains tax?
Introduced by the Canada Revenue Agency (CRA) in 1972, capital gain is any profit made via an investment. For example, if you invest $5,000 into a stock and come out with $7,000, you have a CGT of $2,000.
Many people tend to mistake capital gains tax with income tax. These taxes differentiate from any revenue from your investment while you own it. If you sell a stock for profit, that will result in capital gain. On the other hand, any profit you earn while renting out a room in your house is earned income, thus taxed normally. This is also the case for any profit earned from stocks or bonds.
How is capital gains tax calculated?
Similar to other forms of taxes, the amount of capital gains tax you pay will vary based on different factors. These factors can include your annual income and where you reside. Each province and territory in Canada will have a different tax bracket, combined with federal tax brackets.
When it comes to your capital gain, you must pay tax on half of it as opposed to a 50% tax rate on the gain. For example, let’s say a high-income individual living in Ontario has a salary of $400,000 and a $300,000 gain from selling a second property. Under the current rules, they will pay an income tax of 50% on that capital gain. This works out to $150,000. This same calculation will be applied to all Canadians who pay taxes, based on their province’s tax brackets.
How are capital gains taxes changing?
So, with all this information, you may be curious as to what the changes are. As mentioned above, you currently only get taxed for 50% of your capital gains. According to the 2024 federal budget changes, the “inclusion rate” will be changing from one-half to two-thirds of capital gains that are above $250,000. These changes are set to be made come June 25th and will also account for all capital gains earned by corporations and trusts. If implemented, we can see changes to these taxes as soon as June 25th. So from 50%, it will now be 66.7%.
According to data owned by the federal government, over 28.5 million Canadians have no capital gains income whatsoever. This means roughly 3 million are expected to earn capital gains below the annual threshold of $250,000. On top of this, the data states that only 0.13 percent of Canadians are expected to pay more in personal income tax on their capital gains as a result of the change. This 0.13 percent of Canadians have an average income of about $1.4 million per year.
What do these changes mean for tax rates?
You may be curious as to how these new rules will affect your actual tax rates. Let’s think of an individual who invests and is in the top 2024 tax bracket of 53.53%. The current capital gains inclusion rate of 50%. This means that the marginal tax rate of capital gains is currently 26.76% of any capital gains made in 2024. Therefore, the new top tax rate for capital gains before June 25th will also be the top rate of the first $250,000 gains realized on or after June 25th.
However, with the new changes, the inclusion rate is increasing to 66.7%. This means the same Ontario investor would now face a top capital gains marginal tax rate of 33.59%. This equals 8.93% higher than the current rate.
Do I pay capital gains taxes if I sell my home?
Generally, if the sole purpose of a property is to generate income, you’ll have to pay capital gains taxes on the sale of it. However, when you’re selling your main residence, you won’t typically have to pay any taxes since it is your principal home. If you have an investment property that you rent out, capital gains taxes will play a huge part in your income. For your home to be considered your primary place of residence, you must not only own it, but you or your spouse or children must have lived in the property for 365 days. Additionally, it must be considered a “housing unit.”
Will the new federal budget for 2024 affect property sales?
The new changes for June 25th will continue to maintain an existing exemption regarding profits from selling your personal residence. However, the budget proposes to increase that exemption to $1.25 million. This figure will be indexed to reflect any inflation afterward.
If you are gifted or inherit property from your family and decide to sell it, you may face a higher tax rate. With this being said, this can change depending on how much profit is made and whether or not the property becomes your primary place of residence.
What happens if I rent out my primary home or a unit within it?
As mentioned above, a property won’t qualify as a principal residence if its main purpose is to generate a source of income. But what happens if you’re renting out a unit in, or on the same property as, your primary residence?
Generally, if this happens, you must split the sale price between the part of your property used for your occupancy and the part used to rent. This split is typically done in square meters or the number of rooms used in the home for rent. From there, you will report on the part that is used for rental purposes. At the same time, you will not have to report any capital gains for your primary living quarters.
What happens if you want to rent your property on a site such as Airbnb? If this happens, you will not need to report on the property once it is sold.
What is capital loss?
So, what happens if that investment doesn’t work out the way you wanted it to? When you lose money on the sale of an investment, this is known as capital loss. When this occurs, the CRA will typically allow your capital loss to reduce any capital gains made in the next three years. This means that capital loss can be used to offset any CGT. An example of this is if you sell an investment that results in a capital loss of $25,000, and sell another with a capital gain of $30,000, your capital gain will only be $5,000.
If you’re selling a property that was used for investment purposes, you can claim capital loss on it. However, similar to capital gains, you cannot claim a capital loss on properties that are used as your primary residence.
Capital gains: In conclusion
Whether you are someone who invests or not, understanding capital gains is crucial when it comes to understanding different sources of income. Generally, before you sell (or purchase) any sort of investment, you should always speak to an accountant. This will minimize any sort of taxes you may have to pay in the future. Properties are large investments and should be treated as such!
If you plan on purchasing a property, whether it be for personal use or income, having adequate insurance coverage is essential. Contact us or request a quote today!
