The article “How much is capital gains tax in Canada?—and other reader questions answered” was originally published in MoneySense on May 6, 2024.
Last month’s federal budget introduced changes to capital gains tax in Canada. This has raised many questions about who is impacted and what they should do. Here are some answers.
The 2024 federal budget proposed changes to how capital gains are taxed for Canadians. Certain taxpayers will now be subject to a two-thirds inclusion rate instead of one-half on part or all of their capital gains.
The capital gains inclusion rate refers to how much of a capital gain is included in your income for tax purposes. Since 2000, only one-half of a capital gain has been taxable. In that year, the inclusion rate decreased twice from three-quarters to two-thirds to one-half.
Who is affected by the new capital gains rules?
Taxpayers affected include:
- Individuals with an annual capital gain of more than $250,000
- All corporations
- All trusts
Few people report more than $250,000 of capital gains in a single year. But some Canadian middle-class taxpayers are upset because they may be impacted when they sell a cottage, for example.
Incorporated business owners and professionals in Canada may save money inside their corporation or within a holding company. This enables tax deferral because corporate tax rates on active business income are lower than if the income was earned personally. Investment income within a corporation is taxed at high rates, though, similar to the top personal tax rates. So, incorporated savers will not be able to accumulate their savings as quickly and will have more tax to pay in retirement. Other Canadian corporations, like publicly traded stocks that investors may own in their investment accounts, mutual funds, or pension plans, will all pay more tax as well.
The impact on trusts may be more limited because when trusts are used for tax savings, their income is often allocated to the beneficiaries of the trust and taxed to them personally.
Capital gains with employee stock options
It is worth noting that employees in Canada who receive stock options as compensation from their employer may have their option proceeds taxed at a higher inclusion rate as well. The same $250,000 limit applies, with option income over that threshold subject to more tax. The stock option deduction will decrease from one-half of the option gain to one-third over $250,000, so that two-thirds of the gain is included in income.
Capital gains from the sale of a businesses in Canada
The budget also proposed an increase to the lifetime capital gains exemption (LCGE) when selling qualified small business corporations (QSBCs) and qualified farm or fishing properties. The limit would rise from $1,000,000 to $1,250,000 as of June 25.
A new Canadian Entrepreneurs’ Incentive was also introduced. This incentive would start accruing as of January 1, 2025, in increments of $200,000 to a maximum of $2 million by January 1, 2034. The new entrepreneur exemption would be for founding investors in Canadian-controlled private corporations (CCPCs) to provide additional capital-gains relief for certain business owners.
Current status of the capital gains tax proposals
Interestingly, the Budget Implementation Act tabled shortly after the budget excluded the capital gains tax changes. Finance Minister Chrystia Freeland insists they are still forthcoming, but it does raise questions about whether there may be further revisions to the initial proposals.
Answering your questions about the new capital gains tax changes
MoneySense received are lots of questions about the capital gains tax changes. We will try to tackle a few of them here.
Ask MoneySense
With the new Liberal budget changes to capital gain taxes, will all capital gains on stocks sold in my professional corporation be taxed at 67% even if the gains are under $250,000? Or will they be taxed at 50% until the total of my gains for the year reaches the $250,000 mark?
–Harvey
Is there a limit on capital gains tax?
Corporations will now have 67% of all capital gains included in income, Harvey, instead of 50%. There is no $250,000 limit, as that number only applies to individuals. Corporations will have a higher inclusion rate on every dollar of capital gains.
To be clear, the inclusion rate is not the tax rate. The tax rate varies by province and is roughly 50% for a corporation’s passive income. So, if you have a 66.67% inclusion rate and a 50 percent tax rate, you end up with 33.33% tax payable on a capital gain in a corporation.
This may only seem like an 8.33% tax rate increase, and it is on an absolute basis. But on a relative basis, it means 33% more dollars of tax paid on a capital gain (8.33% divided by 25%).
Ask MoneySense
Is it worth selling all holdings and realizing all capital gains prior to June 25, rather than selling in the future and realizing that same capital gain amount at a higher inclusion rate? This is really a question of differential tax outcome for these two scenarios.
–Alan
Should I try to sell assets before June 25th to avoid an increase on capital gains tax?
I guess the answer is it depends, Alan. If you are expecting to sell an asset within the coming years anyway, there may be an advantage to selling prior to June 25 and paying tax today.
As an example, say you have a corporation that is paying 50% marginal tax. If you sell something before June 25, you will pay 25%. So, if you have a $10,000 capital gain, you will pay $2,500 of tax.
If you sell something after June 25, you will pay 33.33% tax (50% of 66.67%). So, your $10,000 capital gain will have $3,333 of tax. For individuals, this higher inclusion rate and tax rate will only apply to capital gains of more than $250,000 in a single year.
