Canada’s 2024 federal budget proposal has ignited a heated debate surrounding capital gains taxes. To address issues like housing affordability and healthcare, the government is raising the percentage of capital gains that is taxable from 50% to 66.67%, a change taking effect from June 25, 2024.
However, before we dissect the capital gains tax changes in the 2024 Canadian budget, let us get clear on what capital gains are.
What are Capital Gains?
Imagine buying a car for $50,000. After a year, you managed to sell it for a tidy profit of $70,000. That $20,000 difference is your capital gain. A capital gain refers to the profit earned when you sell an asset – tangible or intangible – for more than its original purchase price. This concept applies to a wide range of assets, including real estate, stocks, bonds, and company shares.
The Proposed Change
Previously, only half of your capital gains were subject to tax. For instance, if you earned a $100,000 capital gain from selling an asset, only $50,000 (half) would be taxed.
The proposed change increases the taxable portion from 50% to â…”. Yet, it is important to note that a threshold of $250,000 exists. This means that for capital gains up to $250k, individuals will still be taxed on half the gain. But, for any amount exceeding $250,000, two-thirds will be subject to tax.
Who Will Be Affected by the Capital Gains Tax Change?
The proposed increase in the capital gains inclusion rate will primarily impact individuals and entities with significant capital gains. Here is a breakdown of who will be most affected:
- High-Net-Worth Individuals: Individuals with a history of realizing large capital gains from asset sales will see a significant increase in their tax burden. This includes those who often invest in stocks, real estate, or other assets with the potential for high returns.
- Corporations and Trusts: The change applies a blanket 66.67% inclusion rate to all capital gains earned by corporations and trusts, regardless of the amount.
- Entrepreneurs and Business Owners: Business owners who sell their companies or significant assets may face a higher tax bill due to the increased capital gains inclusion rate.
- Property Inheritors (Maybe): Taxpayers inheriting or receiving a property as a gift and then selling it could be subject to the higher rate, depending on the profit size and if it becomes their primary residence.
Who Likely Won’t Be Affected?
- The Average Earners: Estimates suggest that 3 million Canadians will not see a meaningful change because their capital gains fall below this amount.
- Principal Residence Exemption: Â The sale of your principal residence (primary home) remains exempt from capital gains tax in Canada.
- Limited Investment Activity: For the 28.5 million Canadians with extremely limited investments, the change will have little to no impact.
Government’s Motive: Balancing Fairness and Revenue
The government frames this change as a tax fairness issue. They aim to raise $21.9 billion in revenue over five years to fund social programs and address wealth inequality. The target? High-income individuals who make significant capital gains. Here is what strengthens their argument:
- Limited Impact on Most: Federal statistics show only 0.13% of Canadians earn an average of $1.4 million annually. This small demographic will shoulder most of the increased tax burden.
The government justifies this change as a step toward a fairer tax system, suggesting that those who have the most should contribute more to support social programs that help everyone.
Potential Impact and Public Concerns
The critics argue 3 major points against the proposed change:
- Discouraging Investment: Higher taxes on capital gains might disincentivize businesses and investors from taking risks. This could potentially stifle economic growth and innovation.
- Reduced Investment Flow: Some fear that the increased tax burden will discourage investment in Canadian companies, or even push local talent to take their startups and set up shop somewhere else, potentially hindering long-term economic prosperity.
- Effectiveness in Achieving Goals: There’s uncertainty about the effectiveness of this change in achieving its intended goals. Will it truly generate the desired revenue for social programs, or will it simply discourage investment and hurt the overall economy?
In conclusion, it can be said that the proposed changes to capital gains tax in Canada’s 2024 budget is a complex issue with far-reaching consequences. Understanding why the government is making this change, what the potential benefits and drawbacks are, and what critics are saying is the key to fostering informed public discussions.
Need Help Understanding the Impact on Your Investments?
While this blog explores the general implications, the specific impact on your investments may vary. Nanda and Associates Lawyers can provide personalized legal guidance to ensure you’re prepared for the upcoming tax season.
Contact our experienced Real estate lawyers in Canada today!
