New 2024 Capital Gain Tax rules – what does this mean to you?

New tax changes for capital gains are now in effect. The proportion of capital gains that are taxable increases from 50% to 66.7%, starting June 25, 2024. The new rate applies to net capital gains exceeding $250,000 per year for individuals and to all net gains realized by corporations and most types of trusts. 

What’s Not Changing

Little relief offered despite requests from numerous interested parties, changes to capital gains do not include:

1. Changes to the principal residence exemption. The government is maintaining the principal residence exemption, 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.
2. Tax elections or on paper realizations. A capital gain is normally realized on the disposition of a capital property. With limited exceptions this requires the taxpayer to legally transfer their interest in the property to another person. The current income tax rules do not permit taxpayers to elect to realize a gain or loss on their property without an actual transfer and the government does not intend to introduce such an election.
3. Capital gains averaging over multiple years when the $250,000 annual threshold for individuals has been exceeded. Under the new rules, Canadians with up to $250,000 in capital gains from January 1 through December 31 of each tax year will not pay any more tax; individuals will only pay more tax on capital gains above $250,000. Capital gains cannot be averaged over multiple years to stay under the $250,000 annual threshold.
4. Splitting the individual $250,000 annual threshold with corporations. Under the new rules, individuals cannot share their $250,000 annual threshold with corporations they own. This benefit is strictly for individual taxpayers. Corporations and most types of trusts must include two-thirds of all their capital gains as taxable income.
5. Exemptions for specific assets or corporations. No specific assets or corporations will be exempt from the two-thirds inclusion rate. The two-thirds inclusion rate applies uniformly across all sectors, ensuring fairness and preventing preferential tax treatment.
6. Time-based or other distinctions. There will be no special rules based on how long an asset is held, or other such criteria. The same inclusion rate will apply for all capital gains, regardless of the type of asset or the length of time it was held before selling.

What does this mean to you?

A higher capital gains inclusion rate means higher taxes on the sale of investments and other capital property. For example, an individual subject to the top marginal tax rate can anticipate about an 8% – 9% increase in taxes on capital gains in excess of $250,000, realized on or after June 25, 2024. 

For corporations and trusts (except for graduated rate estates and qualified disability trusts), the tax rate increase is immediate on the first dollar of gains. Corporations may face higher tax liabilities, impacting their profitability and cash flow. Corporations will need to adopt strategic planning measures, revise investment strategies, and potentially increase their reliance on tax advisory services to navigate the new tax landscape effectively.

Strategies to Mitigate Capital Gains Tax

• Tax-Efficient Investment Planning: Review and adjust your investment portfolio to maximize tax efficiency. Consider holding investments for longer periods to delay triggering capital gains.
• Utilize Tax Shelters and Exemptions: Take advantage of tax shelters and exemptions available to individuals from a Canadian tax perspective, such as the Lifetime Capital Gains Exemption (LCGE) for qualifying small business corporation (QSBC) shares. This can significantly reduce taxable gains.
• Incorporate Strategic Timing: Plan the timing of asset sales to optimize tax outcomes. Selling assets in a lower-income year can reduce the overall tax burden.
• Engage in Tax Loss Harvesting: Offset capital gains with capital losses by strategically selling underperforming assets. This can help reduce taxable gains and manage your tax liability.

The amount you end up paying in tax will depend on how much your asset has grown in value, as well as your other sources of income. And between tax-sheltered investment accounts, the principal residence exemption and the rules around capital losses, there are many legitimate ways to ensure you don’t pay more tax than necessary in any given year.