Changes in Capital Gains Tax: What Canadian Homeowners Can Expect

Posted On June 10, 2024

The Canadian government has announced several changes to capital gains tax in the country.

If you are a homeowner thinking of selling that vacation house you bought some time ago or an investor looking at offloading a property, you should pay attention to how your potential profits may be affected. The June 25, 2024, deadline for the initiative is fast approaching, and you should understand the proposed changes and make plans accordingly.

If need more information on Capital Gains Tax, the proposed changes and the possible outcomes that are applicable to real estate, stay with us as we explain.

Capital Gains Tax in Canada

Before we discuss the proposed changes and their implications, we shall quickly look at what is considered capital gains tax in Canada.

Capital gains are when you make a profit from selling an asset, such as stocks, bonds, precious metals, real estate, or other property. On the same lines, a capital loss happens when you sell an asset for less than its adjusted cost base (ACB).

The difference between the asset’s ACB {purchase price of the asset plus any acquisition costs like commissions or legal fees) and what you sold it for is the capital gains.

For instance, suppose you bought an asset for $1000 and later sold it for $1200. The difference between the sale price and the purchase price, which is $200, is your capital gain.

Clearing Misconceptions

Now, let us clarify a common misconception: Many people assume that 100% of their capital gains are taxable.

This is not true; in Canada, only 50% of the capital gain is taxable. This taxable amount is shown as income on your tax return in the year the asset was sold. You’ll be taxed at a rate based on your tax bracket.

To make it simpler, let us take a scenario:

Let’s say you sold an asset for $2,000, and its ACB was $1,000. The capital gain is $1,000 ($2,000 – $1,000).

Since only 50% of the capital gain is taxable, you would include $500 ($1,000 x 50%) as taxable income on your tax return. This $500 will be taxed at your applicable marginal tax rate.

The Proposed Capital Gains Tax Changes

And now, what are the proposed changes?

The federal government’s 2024 budget proposes a shift.

The plan calls for increasing the portion of capital gains subject to taxation from the current 50% to 66.7%. This change will apply to individuals, trusts, and corporations with more than $250,000 in annual capital gains.

However, not all capital gains will be affected. The budget proposes that capital gains up to $250,000 per year for individuals will continue to be taxed at the existing rate. Also, the exemption for capital gains on primary residences is still in force.

This is a ray of light for those with smaller investment portfolios or real estate holdings.

Impact on Homeowners

The capital gains tax changes have strong implications for homeowners, particularly those with secondary properties or investment real estate.

Here’s how the proposed reforms may impact different types of homeowners:

Primary Residence Owners

The good news for most Canadian homeowners is that the principal residence exemption remains intact.

This means that gains realized from the sale of your primary home will continue to be exempt from capital gains taxation, provided the property meets all these conditions:

• Your home was your primary residence for all the years you owned it or for all but one year.
• You report the sale to the Canada Revenue Agency on Schedule 3 and complete Form T2091(IND), designating it as your principal residence.
• You or your family have not designated another property as a principal residence while you owned this home.

Secondary Property Owners

However, the story is slightly different for those who own a second home, including vacation homes, rental properties, or other secondary real estate.

If the capital gains in selling these properties are below $250,000 per year, then 50% of the profits will be taxed.

Any profits exceeding $250,000 per year will attract the new 66.7% capital gains inclusion rate.

Owners of Inherited Property

Under the proposed changes, Canadians who have inherited a family semi-detached home in Burlington or other real estate may also face increased tax burdens.

If the inherited property was not the deceased’s primary residence, the capital gains are calculated based on the property’s value at the time of inheritance rather than the original purchase price.

This could result in a substantial tax bill upon the sale of the inherited property.

For more information on your responsibilities and liabilities when inheriting property in Canada, head over to this blog: https://savemax.com/blogs/legal-responsibilities-when-inheriting-property/

Potential Strategies for Homeowners

With the impending tax changes becoming law on June 24, homeowners should consider some options to mitigate the impact.

Here are some strategies that may be worth considering:

Bring Forward Property Sales

If you were planning to sell a property this year, you may try to bring it forward.

One potential approach that can work is to expedite the sale of investment properties or secondary homes before June 25, 2024.

This could allow homeowners to realize capital gains at the current 50% inclusion rate, potentially saving them thousands in taxes.

Gift or Transfer Ownership

For those considering passing on a cottage or other property as an inheritance to the next generation, do so at a lower tax rate now.

Transferring ownership before the June 25 deadline will minimize the recipient’s tax burden.

Look at Alternative Investment Options

You may choose to shift your investment focus away from real estate and towards other asset, such as stocks or bonds, which may be less affected by the capital gains tax changes.

Potential Implications for the Real Estate Market

So, what does this mean for the real estate market?

Here are some potential scenarios that industry experts are considering:

While we wait for the June 25 deadline, there may be a surge in secondary property listings as owners rush to sell before the higher tax rates take effect. This could lead to a temporary increase in housing supply, potentially putting downward pressure on prices in certain markets.

In addition, the higher capital gains tax may discourage some homeowners from selling, especially in the recreational property and investment segments.

The tax changes will influence prospective homebuyers’ preferences, as they are more cautious about new acquisitions.

Given the complexity of the proposed reforms and the potential impact on individual financial situations, we recommend that homeowners consult a qualified professional. They can provide personalized guidance and the most appropriate strategies for their specific circumstances.

Frequently Asked Questions

Will the capital gains tax changes apply to the sale of my primary residence?

No, the proposed changes will not affect the sale of your primary residence, as the principal residence exemption remains in place. As long as the property meets the necessary criteria, any capital gains realized from the sale of your main home will continue to be tax-free.

How will the new $250,000 threshold work for capital gains?

The $250,000 threshold applies to the total capital gains realized by an individual in a given year. Any gains up to this amount will be taxed at the current 50% inclusion rate, while gains exceeding $250,000 will be subject to the new 66.7% inclusion rate.

If I own a cottage or vacation property, how will the capital gains tax changes impact me?

Owners of secondary properties, such as cottages or investment real estate, will be subject to the higher 66.7% capital gains inclusion rate on any profits from the sale of these assets that exceed the $250,000 annual threshold.

What if I have inherited a property that was not my primary residence?

For inherited properties that were not the owner’s main home, the capital gains will be calculated based on the property’s value at the time of inheritance rather than the original purchase price. This could result in a significant tax bill when the property is eventually sold.

Should I consider selling my investment properties before the June 2024 deadline?

Accelerating the sale of investment properties or secondary homes before the June 25, 2024 implementation date may be a viable strategy to take advantage of the current 50% capital gains inclusion rate. However, it’s crucial to weigh the potential tax savings against other factors, such as market conditions and personal financial goals.

Can I minimize the impact of the tax changes on my financial plan?

It is recommended that you consult a qualified tax professional to explore personalized strategies for mitigating the impact of the capital gains tax changes. This may involve considering alternative investment options, gifting or transferring property ownership, or timing the sale of assets to optimize tax outcomes.

Conclusion

The proposed changes to Canada’s capital gains tax regime have far-reaching implications for homeowners, particularly those with investment properties or secondary residences. As the June 2024 implementation date approaches, Canadian homeowners and real estate investors must learn how to navigate the taxation minefield.

By staying informed, considering available options, and seeking professional guidance, homeowners can take proactive steps to minimize the tax burden

The capital gains tax changes present both challenges and opportunities and with careful planning, homeowners can safeguard their financial well-being. Talk to us to help you walk confidently through this new initiative.