Budget 2024 makes changes to capital gains tax. Who will it affect?

A reporter thumbs through a copy of the 2024 Budget in Ottawa on Tuesday, April 16, 2024. THE CANADIAN PRESS/Sean Kilpatrick

Some Canadians making money from capital gains are set to pay higher taxes starting this year, according to the federal budget tabled by Finance Minister Chrystia Freeland on Tuesday.

The changes to how capital gains are taxed have been proposed as the government eyes ways to make up for some of the big spending measures announced in Tuesday’s budget.

According to the federal budget, the inclusion rate — the portion of capital gains on which tax is paid — for individuals with more than $250,000 in capital gains in a year will increase to two-thirds from one-half.

People realizing up to $250,000 in capital gains will continue to pay tax on 50 per cent of their capital gains. For corporations and trusts, however, there is no threshold. The inclusion rate for them will increase to two-thirds for all realized capital gains.

The Department of Finance said for 99.87 per cent of Canadians, personal income taxes on capital gains will not increase.

“The good news is that these changes, which is an increase in the capital gains inclusion rate from 50 per cent to two thirds, will probably affect very few people,” said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth.

He added: “This is really not aimed at your average investor. Remember, your average investor has most of their money either in a principal residence that is tax-free, in an RSP or a tax-free savings account, where you don’t have to worry about paying tax on capital gains.”

John Oakey, vice president of taxation with Chartered Professional Accountants of Canada, said: “The average person is going to have difficulty generating more than $250,000 of capital gains in any particular year. So, this will be isolated to the more wealthy people who have the ability and the capital to do that.”

He said, however, corporations could take a hit.

“Any corporations that are reinvesting in their business and they’re selling assets and then redistributing those funds into a different business or different product line, they will experience a higher corporate tax rate as a result of this,” he added.

Oakey added that this could also affect people looking to diversity their investments as a way to build up retirement funds.

“There are lots of people that are nearing retirement and so they’re diversifying their portfolio. They’re de-investing in one investment and reinvesting in safer investments as they enter the retirement years. This could be a situation where if they had a few rental properties they managed for a number of years. This could put them into the above the $250,000 threshold,” he said.

A Department of Finance background document explained the changes using the example of a hypothetical high-income individual living in Ontario, who is earning $400,000 as salary and has a $300,000 capital gain. Under the current rules, they would pay tax on 50 per cent—$150,000—of that capital gain.

Under the new rules, they would still pay 50 per cent on the first $250,000 ($125,000) and two-thirds on the rest of the $50,000 ($33,333). This would bring their total taxable amount from capital gains to $158,333.

Freeland and finance officials are billing the move as a change to make taxation more equal.

The Department of Finance described this example in the budget: “A nurse in Ontario earning $70,000 would face a combined federal-provincial marginal tax rate of 29.7 per cent. In comparison, a wealthy individual in Ontario with $1 million of income would face a marginal tax rate of 26.8 per cent on their capital gains. This is not right.”

More on Canada

Oakey said while the average investor would largely be untouched, a one-time event such as the sale of their cottage or investment property could put them over the $250,000 line if the money generated from that sale is higher than the threshold amount.

Golombek said taxpayers with vacation properties need to plan for how the new changes could impact them.

“It will also affect people with a vacation home. So (if) they want to pass that vacation home on,” he said, “or they want to gift that to the children and they want to sell that. Obviously, the capital gains tax will now be higher.”

He said people should also plan to manage their estates well ahead of time. The new rules mean there could be less value that can be passed on to children after death.

“If you have a significant estate, and on that there’s a deemed disposition of all of your property at fair market value, with an inclusion rate now at two thirds instead of 50 per cent. There would be obviously less money for the beneficiaries,” Golombek said.

Video: Federal budget 2024: Canada ‘charting a responsible course,’ Freeland says

The changes don’t go into effect until June 25, if the Budget legislation passes in the House of Commons and the Senate. NDP Leader Jagmeet Singh hasn’t yet said if his party will support the minority Liberals in passing the budget.

Golombek said the budget announcement leaves enough time for people to manage their investments and estates.

“This is a pretty generous timeframe because in the past, when they’ve changed the capital gains inclusion rate, it usually happens on the day of announcement. So you actually got no opportunity to do any kind of planning,” he said.

He recommended sitting down with your financial advisor.

“You need to decide whether it makes sense to somehow, perhaps take a crystallization of those gains prior to June 25 to lock in the lower 50 per cent inclusion rate, rather than waiting till afterwards when if your gains are over $250,000,” he said.