Starting June 25, 2024, the capital gains inclusion rate will be increased from one-half to two-thirds for capital gains of over $250,000 per year for Canadians, and on all capital gains for corporations and most types of trusts.

Four Key Federal Budget Capital Gains Measures

1) Increase in Capital Gains Inclusion Rate

Change:
Effective June 25, 2024, the capital gains inclusion rate increased from 50% to 66.67% for trusts and corporations, impacting the taxation of capital gains. For individuals, the inclusion rate also increased to 66.67% but applicable only on annual capital gains above $250,000. The prior 50% inclusion rate will continue to apply on annual gains below the $250,000 threshold for individuals.

A capital gain occurs when you sell, or are deemed to have sold, a capital asset for an amount greater than its adjusted cost base plus the outlays and expenses related to the sale.

Impact:
This adjustment means a higher portion of capital gains will be subject to income tax, potentially increasing the tax burden on real estate investments, property sales, and capital gains realized inside corporations. For example, an individual subject to the top marginal tax rate can anticipate about an 8% – 9% increase in taxes on capital gains in excess of $250,000, realized on or after June 25, 2024.

Gains on a Canadian residential property (or rights to a pre-construction residential property) held for less than one year may be deemed to be business income (i.e., 100% taxable) under the residential property flipping rule unless an exception is met.

2) Increase to Lifetime Capital Gains Exemption (LCGE) for Entrepreneurs

Change:
The LCGE will increase to $1.25 million (from $1.016 million) for eligible capital gains, applicable from June 25, 2024, onward.

Impact:
If you’re selling shares of qualified small business corporation (QSBC) or qualified farm and fishing property (QFFP), the impact of the increase in the lifetime capital gains exemption rises to $1.25 million.

3) Alternative Minimum Tax (AMT) Adjustments

Change:
Continued adjustments to AMT rules to align with changes in regular income tax calculations. The Alternative Minimum Tax (AMT) is a parallel tax calculation that allows fewer tax credits, deductions, and exemptions than under the ordinary personal income tax rules. Taxpayers pay either regular tax or AMT, whichever is highest.

Impact:
AMT considerations become crucial in planning for capital gains realization and charitable contributions, influencing tax planning strategies.

4) Canadian Entrepreneurs’ Incentive

Introduction:
A new initiative reducing the capital gains tax rate to one-third on up to $2 million of qualifying shares, beginning in 2025. Specifically, this incentive would provide for a capital gains inclusion rate that is one half the prevailing inclusion rate, on up to $2 million in capital gains per individual over their lifetime.

Impact:
While not applicable to professional corporations, this incentive promotes entrepreneurship by lowering the tax burden on qualifying share sales.

Strategic Planning Considerations

Consultation:
Engage with a tax advisor to navigate these changes effectively and tailor strategies to your specific financial situation.

Long-term Planning:
Assess the implications for retirement planning, estate management, and future investment decisions in light of these regulatory adjustments.

As Budget 2024 reshapes tax policies affecting real estate professionals and their clients, proactive planning becomes paramount. This is just a high-level overview and TRREB strongly encourages all Members to seek expert professional advice to safeguard your financial interests amidst these evolving fiscal landscapes.

REMINDER: If the property was solely your principal residence for every year you owned it, and you owned it for at least one year, you do not have to pay tax on the gain. If at any time during the period you owned the property, it was not your principal residence, or solely your principal residence, you might not be able to benefit from the principal residence exemption on all or part of the capital gain that you have to report.

Disclaimer: The summary provided regarding capital gains tax changes is for informational purposes only and should not be considered accounting, tax or legal advice. Always consult with a qualified professional before making any financial decisions or taking any action based on this information which is subject to revision. For personalized advice, consult with a qualified professional.

Some contributions by the Toronto Regional Real Estate Board

Click here for more details from the Government of Canada, Department of Finance