The New Capital Gains Inclusion Rate Impact on Canadians.

The Federal Government of Canada’s 2024 annual budget introduced a significant change to the capital gains rate in Canada under the Income Tax Act. Expected to come into place June 25, 2024, these changes aim to increase tax fairness and revenue, primarily focusing on taxing wealthy individuals and corporations. This article will discuss the specifics of this new inclusion rate, how it impacts Canadians, and what it entails for the real estate market.

The content within this article is strictly for general information purposes only and should not be interpreted as financial or legal advice. We aim to provide accurate, up-to-date information and strongly recommend speaking with a qualified real estate expert, accountant or tax professional before making any financial decisions.

What is the Capital Gains Inclusion Rate?

The capital gains inclusion rate represents the portion of capital gains that are taxable, which occur when assets are sold for more than their initial purchase price. The inclusion rate will rise from 50% to 67% on capital gains that surpass $250,000 under these new regulations. Corporations and trusts will face this capital gains increase after June 25, 2024, regardless of whether they exceed the threshold or not.

It should be noted that capital gains taxes are for investment properties and do not apply to a principal residence, meaning any gains from sales will not be affected by the new inclusion rate, assuming the following conditions are met:

 

• • The property is designated as your primary residence for each year you owned it

• • The property has not been used to generate income (eg. rental income during the time owned unless specific exceptions are met

• • You must not have claimed any other property as your principal residence during the same time period.

Why is the Inclusion Rate Important?

The changes being made to the inclusion rate are important as it determines how much of an investor’s profits from asset sales can be subject to taxes. A higher inclusion rate results in a greater portion of capital gains being taxed, increasing government revenue. By implementing these changes, the government aims to:

Increase Tax Fairness

The government can ensure higher-income individuals are contributing an equal percentage of taxes relative to their income as the average Canadian by taxing a larger share of their capital gains. The 2024 budget also aims to implement a tax on private jets, yachts, and luxury vehicles to take more from the upper class to redistribute among the middle and lower classes.

Boost Revenue

The additional tax revenue generated from this change can be allocated to funding infrastructure and public services, benefiting the economy while making room for wide-scale economic improvements and growth within communities. The previously mentioned redistribution of wealth will help level the field, allowing Canadians to grow together.

Implications for Investors

The new inclusion rate has several implications for investors and is likely to reshape the landscape of investment strategies, financial decision-making and tax planning. The increased rate can have profound effects on investor behavior and market dynamics.

Encouragement of Long-Term Investments

Increasing the inclusion rate will make investors feel more inclined to keep their investments longer due to the taxes associated with capital gains. This promotes long-term investments and increased stability in financial and real estate markets.

These changes are also meant to limit property flipping. Under the Residential Property Flipping Rule, any gains on a property owned for less than 1 Year can be taxed as business income unless excepted. This restriction aims to further promote long term investments, and investors may choose to rent properties instead of selling them, providing more stability to the real estate market.

Impact on the Real Estate Market

The real estate market is a significant source of capital gains for many Canadians and will be arguably the most affected market by these upcoming changes. Commercial real estate investors may become more cautious with their approach and hold properties for longer to avoid immediate taxes, which cools the market. The increased rates are also a deterrent for foreign investment, balancing property pricing and enhancing economic stability.

Residential Real Estate

Homeowners who capital gains exceed the cap of $250,000 will face higher taxes on profits from property sales, influencing investment strategies and the timing of sales.

Commercial Real Estate

Investors in commercial properties, often dealing with substantial capital gains, will also encounter increased taxation, potentially leading to a more cautious investment approach and cooling of the commercial real estate market.

Market Dynamics

The heightened tax burden might result in slower property turnover as investors hold onto assets longer to defer taxes, potentially reducing market supply and impacting prices and availability.

Conclusion

Canada’s new capital gains inclusion rate will cause a large shift in taxation for Canadians and investors alike. Although designed to increase tax fairness and public revenue, it warrants close consideration and planning from all affected parties. The real estate market especially will experience the impact as homeowners and investors find ways to adapt to the increased taxes on capital gains. As these changes come into place, staying up to date with new information and seeking professional financial advice is important for those who may be affected.

For more information on capital gains, please visit WOWA Capital Gains Calculator. To read more about other real estate news and services, please visit the KN Law Real Estate Blog, email [email protected], or call (647) 350-1250.

For direct government information, please visit Budget Canada – Tax Measures or read Chapter 8: Tax Fairness