The Canadian government announced changes to the capital gains inclusion rates, effective June 25, 2024. These changes are particularly relevant for real estate investors, as capital gains can significantly affect your financial outcomes. Keep reading to learn more from our colleague and financial advisor Adam Stauffer.
What Are Capital Gains?
Capital gains are the profits realized from the sale of an asset, such as real estate, stocks, or bonds. When you sell an asset for more than its purchase price, the difference is your capital gain. In Canada, a portion of this gain is included in your taxable income, known as the capital gains inclusion rate.
The New Inclusion Rates
Starting June 25, 2024, the capital gains inclusion rate will increase from 50% to 66.67% for corporations and most types of trusts. For individuals, the rate will also rise to 66.67% for gains exceeding $250,000 annually 12. This means that a larger portion of your capital gains will be subject to taxation.
Example Scenarios
Scenario 1: Individual Real Estate Investor
Let’s say you sell a property and realize a capital gain of $300,000. Under the new rules, the first $250,000 of your gain will be included at the old rate of 50%, and the remaining $50,000 will be included at the new rate of 66.67%.
- Old Rate (50%): $250,000 x 50% = $125,000
- New Rate (66.67%): $50,000 x 66.67% = $33,335
Total taxable capital gain = $125,000 + $33,335 = $158,335
Assuming an individual tax rate of 30%, the final tax bill would be:
- Tax: $158,335 x 30% = $47,500.50
Scenario 2: Corporate Real Estate Sale
If a corporation sells a property and realizes a capital gain of $500,000, the entire gain will be included at the new rate of 66.67%.
- New Rate (66.67%): $500,000 x 66.67% = $333,350
Total taxable capital gain = $333,350
Assuming a corporate tax rate of 26.5%, the final tax bill would be:
- Tax: $333,350 x 26.5% = $88,345.25
Benefits of Tax Planning
Effective tax planning can help mitigate the impact of these changes. Here are some strategies to consider:
1. Timing of Sales: If possible, consider the timing of your asset sales to maximize the use of the lower inclusion rate before the new rules take effect.
2. Income Splitting: Distributing capital gains among family members can help keep individual gains below the $250,000 threshold.
3. Use of Trusts: Certain trusts can be structured to take advantage of lower inclusion rates and other tax benefits.
Understanding and adapting to the new capital gains inclusion rates is essential for effective financial planning. By leveraging strategic tax planning and a stable investment philosophy, you can navigate these changes and continue to achieve your financial goals.
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