What is Capital GainS Tax?

Capital gains in Canada refers to the appreciation in value of any asset or investment since its purchase. When you sell the asset such as a property, at a higher price than what you paid for it, the profit made from the sale is considered a capital gain. This applies to various types of properties including cottages, second homes, investment properties or rental units. So as a Realtor, understanding capital gains is crucial for effectively advising clients on their property transactions and investments.

What are the changes coming to the Capital Gains Tax?

• Budget 2024 announces the government's intention to increase the inclusion rate on capital gains realized annually above $250,000 by individuals and on all capital gains realized by corporations and trusts from one-half to two-thirds, by amending the Income Tax Act, effective June 25, 2024.
• The inclusion rate for capital gains realized annually up to $250,000 by individuals will continue to be 50%.
• For individuals with a capital gain of more than $250,000, they will be taxed on 66.67% of the gain as income—up from the current 50% rate
• The lifetime capital gains exemption currently allows Canadians to exempt up to $1,016,836 in capital gains tax-free on the sale of small business shares, farming and fishing properties. This tax-free limit will be increased to $1.25 million, effective June 25, 2024 and will continue to be indexed to inflation thereafter. In 2025, Canadians with eligible capital gains of below $2.25 million will be better off under these changes.
• The government will maintain the exemption for capital gains from the sale of a principal residence 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. To ensure homes are for Canadians to live in and are not a speculative asset class for investors, properties bought and sold within 1 year for the purpose of property flipping, have been treated as business income since January 1, 2023 . Exemptions exist for many common life situations; these exemptions will remain
• To encourage entrepreneurship, the government is proposing the Canadian Entrepreneurs' Incentive which will reduce the inclusion rate to 33.3% on a lifetime maximum of $2 million in eligible capital gains. Combined with the enhanced lifetime capital gains exemption, when this incentive is fully rolled out, entrepreneurs will have a combined exemption of at least $3.25 million when selling all or part of a business. In particular, the proposal would increase the average federal-provincial marginal tax rate on capital gains above $250,000 of someone earning $1 million a year, to 35.7%.

Principal residence exemption 

With the principal residence exemption, you don’t need to pay tax on the sale of your home, but you may have to for a secondary property or residence, and/or investment property.

According to the CRA, a property is exempt from capital gains tax if your situation meets these four criteria: 

1. It is a housing unit a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.

2. You own the property alone or jointly with another person.

3. You, your current or former spouse or common-law partner or any of your children lived in it at some time during the year.

4. You designate the property as your principal residence.

*Accounting for outlays and expenses:  There is also accounting for outlays and expenses. From your capital gain, you can subtract the costs necessary for selling your property, such as renovations and maintenance expenses, finders’ fees, commissions, brokers’ fees, surveyors’ fees, legal fees, transfer taxes and advertising costs.

Mitigating liability to the Canada Revenue Agency (CRA)

Under the new capital gains tax regime requires a strategic approach tailored to your specific circumstances.

Here are some avenues to explore:

1. Timing of Sale: Consider the timing of selling your property. If feasible, strategically plan your sale to occur before the implementation date of the new tax changes, if they offer a more favourable tax rate compared to post-implementation.

2. Utilize Principal Residence Exemption: If the property in question qualifies as your principal residence, you may be eligible for the principal residence exemption, which allows you to avoid paying tax on the capital gains. Ensure that you meet all eligibility criteria outlined by the CRA.

3. Maximize Deductions: Take advantage of deductions permitted by the CRA. This includes deducting expenses related to the sale of the property, such as renovation costs, maintenance expenses, legal fees, and commissions. Keep meticulous records of these expenses to ensure compliance with CRA regulations.

4. Strategic Use of Capital Losses: If you have incurred capital losses from other investments or properties, consider strategically using them to offset capital gains from the sale of your property. By utilizing capital losses effectively, you can reduce or eliminate your tax liability on the capital gains.

5. Seek Professional Advice: Given the complexity of tax laws and regulations, especially in the context of the new tax changes, it's prudent to seek advice from tax professionals, such as accountants or tax advisors, who specialize in real estate taxation. They can provide personalized guidance based on your specific situation and help you navigate the intricacies of the tax code.

6. Explore Alternative Ownership Structures: Depending on your circumstances and long-term goals, exploring alternative ownership structures, such as trusts or corporate ownership, may offer tax advantages. However, these options require careful consideration and should be evaluated in consultation with legal and financial experts.

7. Monitor Legislative Changes: Stay informed about any further legislative changes or updates from the CRA that may impact your tax liability. Being proactive and adapting your tax strategy accordingly can help mitigate risks and optimize tax outcomes.

*By implementing a comprehensive tax strategy that incorporates these considerations and consulting with professionals as needed, you can mitigate your liability to the CRA under the new capital gains tax framework.

Conclusion

If you have any questions or concerns about your property/properties and would like to have a chat about what this may mean to you, your first call should be to your Accountant and then of course, a quick call to me so we can discuss any potential options you might want to consider prior to June 25, 2024!

Tags

• #capitalgains #taxcanada #housingtax #taxchanges #canadataxes (1)