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Before we get too far into what the capital gains changes in Canada are, let’s go over what capital gains are and who this will affect. It may affect more people in Canada than you think.
What Are Capital Gains?
Capital gains happen when you sell an asset for more than the Adjusted Base Cost. The Adjusted Base Cost is the purchase price of the home as well as any other costs, including commissions and legal fees. These types of assets are called capital property and include:
- Stocks
- Bonds
- Precious metals
- Real estate
That said, when you sell an asset, you don’t always earn capital gains. In some cases, you actually incur capital losses. This happens when you sell the asset for less than the Adjusted Base Cost. These capital losses can offset your capital gains and reduce your taxation. The great thing about capital losses is that they never expire. You can use them for the three preceding years or at any time in the future.
Capital Gains Taxes: Current Vs Changes
Currently, when it comes to capital gains taxes, you pay tax on 50% of your capital gains. For example, let’s say your capital gains are $100,000; you’d then pay tax on 50% of that, which is $50,000.
As of June 15, 2024, the capital gains inclusion rate has increased for capital gains above $250,000. This new inclusion rate is now 67%. However, this doesn’t affect capital gains under $250,000.
Who the Capital Gains Tax Affects
According to the government of Canada, this change will mostly affect the wealthiest 0.13%, 12% of corporations in Canada and those with an income of $1.42 million annually or higher. That said, though, there’s a chance it can impact many middle-class Canadians.
The reason that this may impact middle-class Canadians is the sale of property. While you don’t pay capital gains when you sell your primary residence as long as it’s been your primary residence every year since you’ve owned it, if you’ve ever rented out your home, then you will. It can also affect those who have a rental property or vacation home. If you sell either of those properties, then you’ll notice that you have to pay the increased inclusion rate if your capital gains are above $250,000.
What are the Capital Gains Changes?
According to Finance Minister Chrystia Freeland, while the new capital gains changes are reflected in the budget bill, they’re still set to be implemented as of June 15, 2024. This means that the new inclusion rate of 67% is still coming into effect even though it wasn’t included in the budget implementation bill. According to the government, this budget legislation is supposed to bring in over $19 billion in tax revenues over the next 5 years.
There are many different reasons that the federal government has chosen to implement this bill as of June. According to the Canadian press, raising this rate is necessary to pay for other essentials in other parts of the budget. They also claim that this helps to ensure fairness for all generations and that it’s absolutely fair to ask those who earn more than most Canadians to pay more in taxes. However, this could affect more than those Canadians who are in the top 1%.
Avoiding Capital Gains Tax on Property
As we’ve mentioned, the only exemption to paying capital gains tax is if you’re selling your principal property. In order for a property to be considered your principal residence, you must have lived in it every year that you owned it.
The Difference Between Capital Gains and Interest Income
Determining what kind of income you’re earning can be slightly confusing. Let’s take a look at the different kinds of investment income and how they differ.
Interest Income
Interest income is the income earned on assets such as bonds and GICs. Interest income is taxed at the same marginal rate as your other taxable income. You should receive tax forms for any interest income you earned on investments during the tax year and pay the tax on that interest when you do your annual tax return.
Dividend Income
Dividend income is different than interest income. Dividends are essentially income that’s distributed to shareholders. If you own stocks and they’re distributed to you, these are then taxed at a lower rate than interest income. In Canada, you can even qualify for the dividend tax credit.
Capital Gains
Capital gains are income earned from the sale of a property or asset. Anything you receive above the purchase price that you paid for the asset is considered capital gains and is taxed accordingly. Whether you pay tax on 50% of the capital gains or 67%, it’s all taxed at the marginal rate.
Marginal Tax Rates in Canada
As we already discussed, in Canada, the amount that you pay for capital gains taxes is based on your marginal tax rate. Your marginal tax rate is based on your annual taxable income amounts as well as the province that you live in. Let’s take a look at both the federal tax rate and the provincial tax rates.
Federal Tax Rates
| Taxable Income Amounts | Marginal Tax Rate |
| On the portion of the income from $0 - $55,867 | 15% |
| On the portion of income, that’s $55,867 - $111,733 | 20.5% |
| On the portion of income that’s $111,733 - $173,205 | 26% |
| On the portion of income that’s $173,205 - $246,752 | 29% |
| On the portion of income, that’s $246,752 plus | 33% |
Provincial Tax Rates
| Provinces/Territories | Tax Rates |
| British Columbia | 5.06% on the first $47,937 7.07% on the next $47,938 10.5% on the next $14,201 12.29% on the next $23,588 14.70% on the next $47,568 16.80% on the next $71,520 20.50% on amounts over $252,752 |
| Alberta | 10% on the first $148,269 12% on the next $29,656 13% on the next $59,308 14% on the next $118,615 15% on amounts over $355,845 |
| Saskatchewan | 10.5% on the first $52,057 12.5% on the next $96,677 14.5% on amounts over $148,736 |
| Manitoba | 10.8% on the first $47,000 12.75% on the next $53,000 17.4% on any amount over $100,000 |
| Newfoundland and Labrador | 8.7% on the first $43,918 14.5% on the next $43,197 15.8% on the next $67,849 19.8% on the next $61,699 20.8% on the next $275,869 21.3% on the next $551,739 21.8% on any amount over $1,103,478 |
| Nova Scotia | 8.79% on the first $29,590 14.95% on the next $29,590 16.67% on the next $33,820 17.5% on the next $57,000 21% on amounts over $150,000 |
| Prince Edward Island | 9.8% on the first $32,656 13,8% on the next $31,657 16.7% on the next $40,687 18% on the next $35,000 18.75% on amounts over $140,000 |
| Ontario | 5.05% on the first $51,446 9.15% on the next $51,448 11.16% on the next $47,106 12.16% on the next $70,000 13.16% on amounts over $220,000 |
| Quebec | 15% on the first $51,780 20% on the next $51,765 24% on the next $22,455 25.75% on amounts over $126,000 |
| New Brunswick | 9.68% on the first $49,958 14.82% on the next $50,318 16% on the next $85,148 19.5% on amounts over $185,064 |
| Northwest Territories | 5.9% on the first $50,597 8.6% on the next $50,601 12.2% on the next $63,327 14.05% on amounts over $164,525 |
| Yukon | 6.4% on the first $55,867 9% on the next $55,866 10.9% on the next $61,472 12.8% on the next $253,248 15% on amounts over $500,000 |
| Nunavut | 4% on the first $53,268 7% on the next $53,269 9% on the next $66,668 11.5% on amounts over $173,205 |
Overview
When it comes to the new capital gains tax changes, it’s the inclusion rate that is changing, not the tax rate. If your capital gains are higher than $250,000, then your inclusion rate is then upped to 67%. However, since you don’t have to pay capital gains on your primary residence, those who will be affected are mainly those with short-term rentals and recreational property, really any secondary properties, that they’re looking to sell.
There are ways to combat capital gains, though, and one way you can do so is with capital losses. Before you file your annual tax return, the best way that you can save on your taxes is to speak with a tax professional.
