The 2024 federal budget was recently released and it includes a number of proposed tax changes. The change to capital gain tax is one topic that has prompted much debate and anxiety.
We want to cut through the noise and explain what is happening, how it could potentially impact you, and what you can do about it.
What is changing?
In simple terms, a capital gain is the increase in value of an asset from when you purchased it to when it is sold. The current tax rules stipulate that half of all capital gains will be included in your taxable income. The budget proposes that an individual who realizes capital gains on or after June 25, 2024 will still be able to take advantage of the 50% inclusion rate but only up to$250,000. After this threshold, capital gains will be subject to a new inclusion rate of 66.7%.
For trusts and corporations, the rules are slightly different. The higher inclusion rate of 66.7% will apply to all gains realized on or after June 25 of this year.
How will the changes impact you?
The Federal Government has said that these changes will only affect 0.13% of the Canadian population. And it is true, a large percentage of people will never reach the $250,000 threshold of capital gains on an annual basis. However, the new regulations may impact you in unexpected ways.
Many affluent Canadians will not have cause for concern when it comes to their portfolios. If they need to realize their capital gains before the June 25 deadline, stocks, bonds, and other liquid investments will not be difficult to sell. However, real estate can add another layer of complexity to your situation.
Consider these scenarios, for example:
Your children have no interest in inheriting the family cottage, so you are thinking about selling it in the next couple of years to enjoy the proceeds in retirement.
Or, when your parents passed away a decade ago, they left the family farm to you and your sibling and neither of you wish to live or work on the property.
Given the price appreciation in real estate, it is very possible that the gain on either of these properties will be far more than $250,000. That means that if you sell the properties anytime after June 25, any gain over and above that $250,000 mark will be taxed at the higher rate.
It is worth noting that your principal residence is exempt from capital gain tax.
Business owners who have income properties may also be similarly affected by the new rules.
If you have a family trust, it is important to have a conversation with your tax advisor. Most trusts distribute their capital gains to their beneficiaries, which means the gains are taxed in the beneficiaries’ hands and the changes to capital gains tax will not impact the trust. However, if you have kept income in your trust or if you have done strategic planning within the trust, you need to review your personal situation with your tax professional.
What can you do?
The window to act may be short, but it is important to do the math, build a plan with your professional team, and make a strategic decision that will benefit you and your family in the long-run.
A great first step is completing a self audit. Review the assets you hold in non-registered accounts and your real estate holdings (excluding your primary residence). Write down the cost you purchased them for, what they are valued at today, and what you have sold or plan on selling. If the total is anywhere near $250,000, you need to have a conversation with your professional team.
If you usually file your taxes yourself, this may be the year to consider working with an accountant. The proposed changes to capital gains can be complex, and it is important to get the advice you need to make the decisions that are right for you.
It may also be a good time to discuss some alternative strategies with your wealth advisor. For example, if you have a vacation property that you want to keep in the family, one option is to put money into an insurance policy to offset that gain in the future.
Remember that the proposed budget is not yet law. It is important to make your voice heard by writing to your members of your parliament.
If you want to learn more about wealth management strategies that could help reduce your tax bill, register for our upcoming seminar!
Register for Calgary by clicking here.
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CIBC Private Wealth consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. The CIBC logo and “CIBC Private Wealth” are trademarks of CIBC, used under license. “Wood Gundy” is a registered trademark of CIBC World Markets Inc.
David Popowich and Faisal Karmali are Investment Advisors with CIBC Wood Gundy in Calgary. The views of David Popowich and Faisal Karmali do not necessarily reflect those of CIBC World Markets Inc.
Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.
If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.
