The 2024 federal budget recently announced a change to the capital gains tax, which caused concern for Canadians who own multiple properties. While the Liberal government has indicated that the new plan is aimed at the wealthy and that 99.87 percent of Canadians will not be affected, we have yet to see how this will play out. “Average” Canadians have been told not to worry, but what about those average Canadians who invested in real estate as part of their long-term savings plan?
WHAT ARE CAPITAL GAINS?
A capital gain is the difference between the amount you paid for a home or property and its selling price. It can also apply to a stock or a mutual fund, in fact, any asset that gains value. A capital gains tax is applied to this difference, but only for properties other than your primary residence. These properties could include an investment property, a condominium, a cottage, or a rental property.
HOW DOES THE CAPITAL GAINS TAX WORK?
Capital gains must be reported as income on your income tax return. So, if you sell a property other than your primary residence, you must report that gain when you file your taxes. For example, if you purchased a cottage for $200,000 and it sells for $500,000, you have a capital gain of $300,000. Since 2000, and until June 25, 2024, when the new rules take effect, 50 percent of the gain is subject to tax. In this example, your taxable income will increase by $150,000.
The new rules increase the “inclusion rate” from 50 percent to 67.5 percent on every dollar over a $250,000 capital gain for individuals. In the above example, the amount to include in your taxable income will be 50 percent of the first $250,000 ($125,000) plus 67.5 percent of the remaining $50,000 ($33,750), for a total of $158,750. Overall, property owners will pay more tax on any gains more than $250,000 in any given tax year. The capital gains tax for corporations is now 67.5 percent across the board.
WHY INCREASE THE TAX NOW?
The federal government has stated they are targeting the wealthiest portion of Canadians — individuals and corporations — to ensure they pay higher taxes than average working Canadians. The intent is to use the additional tax money collected to help fund the housing plans outlined in the federal budget, including “a commitment to make housing affordable so that no hard-working Canadian spends more than 30 percent of their income on housing.”
According to the federal government, 28.5 million Canadians are unlikely to earn any capital gains income, and three million will earn capital gains below the $250,000 annual threshold. They argue that the new tax rules will only affect the wealthiest 0.13 percent of the population, who report large capital gains in a tax year.
WILL THIS AFFECT THE AVERAGE HOMEOWNER?
The new capital gains tax will affect any Canadian property owner or business owner who owns more than one property that has appreciated by more than $250,000 upon its sale. Many Canadians purchased investment properties to rent or as summer cottages as part of their retirement plans.
The downside for those with investment properties is that the appreciation over the last four years (since COVID restrictions began in 2020) has been exponential compared to the average historical growth over the same period a decade ago. The tax is calculated retroactively, irrespective of when you purchased the property.
HOW COULD THIS CHANGE THE REAL ESTATE LANDSCAPE?
Some Canadians may be motivated to sell additional properties before the June 25th deadline to avoid paying the additional tax, which may result in a surge in inventory. Market prices continue to be high, and cashing out now may be an incentive for some property owners. The tax change could also affect estate planning for those who intend to keep a cottage or vacation property in the family.
While the federal government defends the change and insists only the wealthy will be affected, many Canadians who bought properties when prices were low may lose a larger portion of their retirement investment to taxes when they sell.
