The Federal Government 2024 Budget:

Modifications to the Capital Gains Tax

By Mirjana (Mira) Markovic

The Federal Government has announced the 2024 budget (“budget”) on Tuesday, April 16, 2024, and many Canadian entrepreneurs, and investors have voiced their dissatisfaction especially on how the proposed increase of capital gains tax is structured. The budget proposes to increase the inclusion rate on capital gains on proceeds of sale on assets like a stock, mutual funds, income properties, and businesses. If approved, the budget will take effect on June 25, 2024. Although, the budget details myriad adjustments, this article will focus on revision of the capital gains inclusion rate. Let us take a deeper dive.

What is a Capital Gain?

Capital gain is the difference between the cost of an asset and the total sale price. It is the revenue that an individual or business generates from selling an asset. For example, if Lucy purchases a recreational property (i.e. cottage) and pays $750,000.00, but later sells the same property for $850,000.00, she would realize/generate a capital gain of $100,000.00.

Currently, the inclusion rate is 50% therefore, only 50% of the capital gains are taxable. Lucy would be taxed on 50% of the capital gains realized/generated ($100,000.00 x 0.5 =$50,000.00). Lucy would pay capital gains tax on $50,000.00 and not the remaining $50,000.00.

Changes to the Capital Gains Tax in 2024

The budget indicates that current tax rates earned from wages, capital gains, and dividends favour the wealthy therefore, the goal is to try to stabilize this to benefit the middle-class Canadians as well. On the other hand, the consensus among the entrepreneurs and investors appears to be that the wealthy Canadians will disproportionately benefit from the changes to the inclusion rate.

The budget proposes the following changes:

1. individuals who realize/generate up to $250,000.00 in capital gains in any given year, will continue to be taxed at 50%;
2. individuals who realize/generate more than $250,000.00 in capital gains in any given year, will be taxed at the 67% inclusion rate instead of 50% inclusion rate;
3. all capital gains realized by corporations and trust would be taxed at 67%. The threshold of $250,000.00 would not be applicable to these entities.

Now, with the proposed changes, let’s say that Lucy’s capital gain for the recreational property (i.e. cottage) is $300,000. Lucy would be taxed at the 50% inclusion rate on the fist $250,000 and then taxed at the 67% inclusion rate on remaining $50,000.

Below are some interesting statistics that the Federal Government has released to explain why the tax threshold was set to $250,000.00:

1. 28.5 million Canadians are expected not to have any capital gains income;
2. 3 million Canadians are expected to have proceeds below the $250,000.00 annual threshold;
3. 0.13 % - 40,000.00 (individuals with an average income of $1.4 million annually), are expected to pay more taxes on their capital gains in any given year; and
4. 12.6 % -307,000.00 (corporations), are expected to pay more taxes on their capital gains in any given year.

What does this mean for property sales?

Drawing on our example above, since Lucy sold a recreational property (i.e. cottage), capital gains tax was triggered. However, it is important to note that if Lucy sold a home that was her primary residence for the duration of the ownership, the capital gain from such a sale would not trigger capital gains tax.

I note that the proposed changes to the 2024 budget will maintain the existing exemption for capital gains when a primary residence is sold. However, if at anytime, the primary residence status changed for the duration of ownership, it could potentially trigger the capital gains tax once the property is sold.

Furthermore, the budget will also retain the existing lifetime capital gains tax exemption on the sale of small business shares, farming, and fishing properties, but proposes to increase the exemption from $1,016,836 to $1.25 million for dispositions that occur after June 24, 2024.

Lastly, properties that are inherited or gifted from family members but are later sold could also trigger the increased capital gain tax of 67% however, that would depend on how much capital gains is realized and whether the property is a primary residence.

Concluding Remarks

Opinions on the 2024 budget are very vigorous and no one is holding back. Since the year 2000, the inclusion rate on capital gains has been 50% however in the 1990’s that rate was 75% for almost an entire decade. Many tax specialists anticipated that a possible increase to the capital gains tax would occur a result of the COVID-19 pandemic because the government debt levels elevated substantially at this time and continue to surge. For example, the government has allocated substantial funds to numerous projects to address the current housing crisis. Recently the vacant home tax and the underused home tax were implemented to further assist in generating revenue for such projects. Now, we are seeing an increase in the capital gains tax which I presume is also an additional tool that will be used to aid in numerous projects and programs proposed by the 2024 budget.

The above statistics released are a mere estimate. We will have to wait and see how the increase in the inclusion rate will actually impact Canadians so that we can determine if the above statistics will remain as projected or increase in the years to come.

The full 2024 Federal Budget Tax Highlights can be found here

I hope that this article has provided you with some helpful information. If you have any questions, please do not hesitate to contact me at mira@sorbaralaw.com.