Proposed Changes to Capital Gains Tax

Proposed Changes to Capital Gains Tax: How it impacts Real Estate Transactions

Budget 2024 has introduced and proposed significant changes to Canada’s capital gains tax rule, which have potential implications for individuals, real estate investors and the selling of investment or properties other than primary residences, should these rules be adopted and come into effect on June 25th, 2024.

Budget 2024 proposes an increase in taxes on capital gains.

To make Canada’s system more fair, the inclusion rate, the portion of capital gains on which tax is paid, for capital gains for individuals with more than $250,000 in capital gains in a year will increase from one-half to two-thirds. Individuals will continue to only pay tax on 50% of any capital gains up to $250,000 per year.

The inclusion rate will also increase to two-thirds for all capital gains realized by corporations and trusts.

The new rules will apply to capital gains realized on or after June 25, 2024.

Let’s explore how these proposed changes may impact individuals engaged in real estate ventures.

Selling your principal residence will continue to be exempt from capital gains taxation. However, gains from your second (or any other) property, will be subject to new capital gains tax rule.

The Canadian Department of Finance provides the following example:

Example of a High Income Individual:

A high income individual living in Ontario with a $400,000 salary also has a $300,000 gain from the sale of a second property. Under the current rules, they pay income tax on 50% or $150,000 of that capital gain.

If they have the same gain in 2025, they will now pay tax on $158,333 of the gain (50% x $250,000 = $125,000) plus (2/3 x $50,000 = $33,333) = $158,333).

Because of their high income putting them in the highest marginal tax rate, the change to capital gains taxation will cost them $4,461 more in combined federal- provincial income tax.

Exemptions

The Department of Finance also state that middle class Canadians will continue to benefit from the $250,000 annual threshold, tax-free savings accounts, the principal residence exemption, and exemptions for registered pension plans.

Capital gains from principal residences will remain tax-free to ensure Canadians do not pay capital gains taxes when selling their home. Any amount you make when you sell your home will remain tax-free.

Capital gains within a Registered Retirement Savings Plan, Tax-Free Savings Account, Tax-Free First Home Savings Account, or other registered savings vehicle will remain tax-free. Capital gains within a registered pension plan and the Canada Pension Plan and Quebec Pension Plan will remain tax-free.

Capital gains for individuals up to $250,000 from the sale of cottages, investment properties or stocks beyond the limits of tax-sheltered savings vehicles will continue to benefit from the current 50% inclusion rate.

So Who Will Bear the Brunt?

Real estate investment has long been a cornerstone of wealth-building strategies for many Canadians. However, the proposed changes to capital gains tax outlined in Budget 2024 may introduce new considerations for investors navigating the real estate market. Understanding the implications of these amendments is crucial for individuals looking to buy, sell, or hold investment properties.

Individuals who receive a property as a gift or inheritance from their family and subsequently sell it may encounter the elevated capital gains tax rate. However, this scenario’s outcome may vary based on factors such as the magnitude of the profit and whether the property is designated as a primary residence.

Increased Inclusion Rates

One of the key changes in the proposed budget is the elevation of the inclusion rate for capital gains realized above $250,000 annually. Under the new regime, individuals selling second or investment properties and realizing substantial gains may face a higher tax burden, with the inclusion rate rising to two-thirds. While gains below the $250,000 threshold will continue to be taxed at the existing 50% rate, investors with significant profits could see a notable increase in their tax obligations upon property sale.

According to federal government data, 28.5 million Canadians are not expected to have any capital gains income at all. Three million are expected to earn capital gains below the $250,000 annual threshold. The data also indicates only 0.13% of Canadians, people with an average income of about $1.4 million a year are expected to pay more in personal income tax on their capital gains as a result of the change.

Impact on Selling Investment Properties

For real estate investors considering the sale of investment properties, the proposed changes to capital gains tax warrant careful evaluation. Individuals anticipating capital gains exceeding the $250,000 threshold may need to reassess their timing and strategy for property divestment. Selling before the implementation of the proposed inclusion rates on June 25, 2024, could potentially mitigate the impact of higher taxation, particularly for those facing substantial gains.

Considerations for Holding Properties

Conversely, investors currently holding investment properties may face altered dynamics in their long-term investment strategy. The prospect of higher capital gains taxes may influence decisions regarding property retention versus divestment. Individuals may opt to retain properties for longer periods to defer taxable gains or explore alternative investment avenues to optimize tax efficiency.

Navigating Tax Efficiency

In light of the proposed changes, real estate investors are advised to consult with financial advisors and tax professionals to devise strategies for maximizing tax efficiency. Exploring tax-deferred investment vehicles, such as Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs), could offer avenues for mitigating the impact of higher capital gains taxes on real estate transactions.

Closing Comments

Budget 2024’s proposed changes to capital gains tax carry significant implications for real estate investors and the selling of investment properties. By elevating inclusion rates for substantial gains, the government aims to enhance tax fairness while generating revenue to support essential initiatives. Real estate investors must carefully assess the impact of these amendments on their investment strategies and consider proactive measures to navigate the evolving tax landscape effectively. As Canada’s property market continues to evolve, staying informed and adaptable will be paramount for investors seeking to optimize their financial outcomes in the face of regulatory changes.

If you are considering selling one of your GTA Investment properties, contact Team Kalia so we can discuss the timing and next steps for the sale of your investment home or condo.

Contact Team Kalia if You are Looking to Sell Your Investment Home or Condo

    Your Name (required)

    Your Email (required)

    Phone (required)

    Are you in the market to? (required)

    BuySellInvestEvaluate PropertyOther

    Additional comments and information

    captcha