Released on April 16, 2024, Canada’s new federal budget proposes to increase the capital gains inclusion rate from ½ to 2/3 for capital gains realized on or after June 25, 2024. For individuals, this increase applies to the portion of capital gains realized in the year that exceed $250,000. For corporations and trusts, the change applies to all gains realized on or after June 25, 2024.
Read our article on who should consider realizing capital gains before the June 25, 2024 changes. There’s not a lot of time, but there’s a lot to consider.
After the changes, what is the effective tax rate on capital gains?
We’ve summarized the effective tax rate before and after the change in this table:
|
Individual |
Corporation (CCPC) | |||||
| Current | Proposed > 250k | Change | Current | Proposed | Change | |
| Capital gain | 100,000 | 100,000 | 100,000 | 100,000 | ||
| Capital gain inclusion rate | ½ | 2/3 | ½ | 2/3 | ||
| Taxable capital gain | 50,000 | 66,667 | 50,000 | 66,667 | ||
| Tax rate | 53.53% | 53.53% | 50.13% | 50.13% | ||
| Taxes payable | 26,765 | 35,687 | 25,065 | 33,420 | ||
| Effective tax rate on capital gain | 26.77% | 35.69% | 8.92% | 25.07% | 33.42% | 8.36% |
Who should consider the impact of these changes?
You should consider the impact of these changes if you:
- hold a secondary residential property such as a cottage with a large unrealized capital gain;
- have a large portfolio in a non-registered investment account with large unrealized capital gains;
- were considering ceasing to be a Canadian tax resident;
- have assets with large unrealized capital gains that will be realized on death; or
- hold assets with large unrealized capital gains in a spousal or common-law partner trust or an alter ego trust.
In all cases, one must evaluate pre-paying tax at lower rates against deferring the payment of tax possibly years into the future when the capital gain would otherwise be realized. Where you have a sale that will likely occur later in 2024 or in 2025 there may be more value to pre-paying the tax at lower rates. It should also be considered whether future governments might return the inclusion rate to ½.
Are there actions I can take to lock-in the lower capital gains rate even if I can’t sell my asset before June 25, 2024?
Yes, in most cases there are steps that can be taken to sell an asset to a non-arm’s length party (e.g., a spouse, a corporation you control) before June 25, 2024 to lock-in the lower capital gains tax rate even if you can’t sell the asset to an arm’s length purchaser until a later date.
How can Stern Cohen help?
Stern Cohen can provide advisory to help determine the most beneficial course of action based on your situation. Our assistance could include:
- assessing the tax impact on selling assets before vs. after the changes;
- discussing strategies for gifting cottages or similar properties prior to death and prior to June 25, 2024;
- discussing strategies on realizing gains before June 25, 2024; and
- assistance on becoming a non-resident of Canada.
Lock in lower capital gains?
Disclaimer: This article is intended to inform readers in general terms. It is not intended to provide any tax or business advice. Please consult your Stern Cohen advisor if you have any questions about your unique situation. While we have tried to ensure the accuracy of the information in this article, we accept no liability for errors or omissions.
