Capital Gains Tax Canada 2024: New Two-Thirds Inclusion Rate Explained

The Ministry of Finance of Canada has announced an increase in the Capital Gains tax rate from one-third to two-thirds for certain capital gains. The Canadians thinking of selling or disposing of their capital assets should understand the new changes to know their taxable capital gains. 

Capital Gains Tax Canada 2024

In Canada, when you sell a capital asset or investment, you pay taxes on the profit of the selling of the assets. For instance, if you have $500 worth of assets and you sell the assets for $550, you earn a capital gain of $50.  Your capital gains on the selling of assets are taxable in Canada, as it is treated as the income earned during the year.

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In Canada, you pay Capital gains tax on all types of investments and property, such as bonds, shares, stocks, cottages, rental properties, etc. except personal use assets, such as cars, your primary residence, etc. 

In Canada, 50% of your Capital gains are taxable and get added to your income for the tax year. According to reports,  no Canadian pays more than 27% in CGT due to the current income tax rates of Canada. The taxpayers can get some tax relief on the Capital gains tax based on the requirements. The Canada Revenue Agency (CRA) administers and oversees the CGT. 

Capital Tax Inclusion Rate for 2024-25

In budget 2024, the Canadian government proposes to increase the Capital gains tax inclusion rate, that is 50% of the capital gain to two-thirds of the capital gain. The government released the Notice of Ways and Means Motion on 10 June 2024 to introduce the legislation to implement the Capital gain inclusion rate proposal. 

The Capital tax inclusion rates are adjusted based on the legislation in the following manner:

  • The capital gain inclusion rate for trusts and corporations has risen from the previous rate of ½ to ⅔ of the capital gain. 
  • The capital gains inclusion rate for individuals is also the same for the capital gains that exceed the income threshold up to Canadian $250,000.

The government confirms that the new capital gain inclusion rates for all capital gains and losses would be effective from 25 June 2024. According to the legislation, individuals with the capital gain tax on capital gain income under $250,000 would reduce their inclusion rate from two-thirds to one-half of the income. The taxpayers who realized the capital gain under $250,000 directly can only take advantage of this reduction. 

If multiple individuals make a profit on the capital owned by multiple owners, each individual will access their $250,000 income threshold. 

Clarification of Canada Capital Gains tax rules

The Canadian government plans to make capital gains taxation more fair and predictable for Canadians, especially for retirees and businesses wishing to invest in Canada. In the currently introduced legislation, the government clearly states the changes to the capital gains tax and the things that do not change with this legislation. 

The taxpayers can expect the following things to remain the same with the changes in Capital Gains taxation:

  • The principal residence will remain exempted from the Canadian Capital gain tax to save people who sell their primary residence due to circumstances. So, for people who sell their primary residence, there is no need to pay capital gain tax. 
  • The government does not intend to introduce tax elections, which means the taxpayers need to legally transfer their interests to realize their gain or loss in the property on the disposition of the property. 
  • The two-third capital gain inclusion rate applies to all specific assets or corporations. The rule applies to all sectors to make the tax environment fairer for the taxpayers and prevent preferential tax treatment.
  • The capital gains over multiple years cannot be averaged to keep the threshold under the limit. The taxpayers do not have to pay the capital gains tax for income up to $250,000 from 1 January to December 31 for each tax year unless the income goes above the limit. 
  • Under the capital gains tax rules, individuals cannot split their annual threshold capital gains with their corporation. 
  • The capital gain inclusion rate will be applicable regardless of how long an asset is held or any other special rules. The length of time for selling the assets and types of assets does not affect the conclusion rates. 

Net Capital Losses to offset the capital gains tax

The Net capital losses of other years can be carried forward to the current tax year to offset the capital gains tax for the year. Let’s understand this in layman’s language, your loss of the previous year when you sold the capital was 100 and the gain you made in the tax year is again 1000, the gains and loss cancel each other and you don’t have to pay any taxes on your current year capital gain. 

Under the capital gain rule, the taxpayers can deduct the net capital losses for three years to the tax year, even when the inclusion rate is different for the years. According to the reports, the current adjustments would allow the net capital losses rule after 25 June 2024, but the additional adjustments would be required when the capital gains tax is subjected to a one-half inclusion rate rather than the basic two-third inclusion rates. 

Adjustments for Net Capital losses of other years

Inclusion Rate During Capital Loss Inclusion rate to offset the Capital gain in the tax year
One-half  Two-third
One-half  1 4/3
Two-thirds 3/4 1
Three-quarters 2/3 8/9

The taxpayers can deduct the net capital losses, Lifetime Capital Gains Exemption, Canadian entrepreneurs incentives, and proposed Employee Ownership Trust tax exemption to the applicable capital gain tax after the inclusion tax is applied to their capital gains taxable income. 

 

Overall, taxpayers have only a few days to consider their capital gains tax planning as the new rules will be effective from 25 June 2024 which will change the dynamics of Canadian capital gains tax.  

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