In a recent announcement, the Canadian government unveiled proposed changes to the taxation of capital gains in its 2024 budget. The key proposal involves increasing the inclusion rate on capital gains, particularly for the wealthiest individuals. Here’s what you need to know:
What’s Changing?
- The inclusion rate on annual capital gains realized above $250,000 for individuals would increase to two-thirds, up from the current 50 per cent. Gains below this threshold would still be taxed at the 50 per cent rate.
- The changes would apply to all capital gains realized by corporations and trusts, regardless of the $250,000 bar.
- The proposed change is set to take effect on June 25, 2024.
Additional Proposals:
- The budget also proposes expanding the lifetime capital gains exemption for small businesses, farms, and fishing properties to $1.25 million.
- A new carve-out for entrepreneurs is suggested, protecting the sell-off of some shares in specific instances. This would apply to up to $2 million in capital gains per individual over a lifetime, with proceeds taxed at an inclusion rate of 33.3 per cent.
- Selling a primary residence would remain excluded from capital gains taxes.
Who Will Be Affected?
- The current 50 per cent inclusion rate is viewed as benefiting wealthy Canadians disproportionately compared to middle-income households.
- The government estimates that 28.5 million Canadians will not have any capital gains income next year, while three million others will have proceeds below the $250,000 annual threshold.
- Only 0.13 per cent of Canadians (approximately 40,000 individuals) are expected to pay more taxes on their capital gains in any given year, with an average income of $1.4 million.
- Around 307,000 corporations in Canada (12.6 per cent) are estimated to have capital gains and will be affected by the proposed changes.
The decision to increase capital gains taxes surprised many, as speculation had centered on other potential tax strategies like a wealth tax or broad industry levies. Despite concerns about its impact on investment behavior, the government stands by its move, emphasizing the need to address economic disparities and fund essential priorities.
Real estate transactions will also be affected, as secondary property sales will now incur higher capital gains taxes. This change has prompted concerns within the real estate sector about its potential to impede property sales and contradict government efforts to boost housing supply.
With the new tax regime set to prompt a rush of asset sales before its implementation, the government anticipates a surge in income tax revenue in the short term. Yet, long-term effects remain uncertain, with experts urging caution and strategic decision-making among affected parties.
As stakeholders brace for the implications, the budget’s capital gains tax hike signals a significant shift in fiscal policy, with ramifications reaching far beyond the realm of taxation.
For more information, contact Joe Rullier
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