What to Know About the New Capital Gains Inclusion Rate

There has been much discussion over the increased capital gains inclusion rate announced in the 2024 Federal Budget, so let’s break down what it means, and who is affected by this change.

Capital Gains Inclusion Rate

Prior to this change, if you disposed of capital property (other than your principal residence, such as a vacation property or investments held in a non-registered account) 50% of the capital gain was included in your taxable income. The new rules will increase the inclusion rate to 66.7% for individuals realizing gains above $250,000 (below this will remain at 50%). For corporations the 66.7% rate will apply to all gains. These new rules will come into effect on June 25, 2024, so any gains realized prior to this will use the 50% inclusion rate.

Who Does this Affect?

These changes primarily affect high-income individuals who realize large capital gains in a non-registered portfolio and incorporated businesses who realize gains through selling investments or property.

The impact will also be felt by individuals who are selling a vacation property where the gain is more than $250,000. This is especially true for someone who has inherited a family cottage since the cost base is typically quite low on these properties.

Similarly, individuals who own rental properties will pay more in taxes if the gain on the sale is more than $250,000 or if rental properties are owned inside a corporation.

Planning Considerations

Since the new inclusion rate doesn’t take effect until June 25, 2024, this provides the opportunity to realize gains prior to that date. This is only relevant to people who hold investments inside a corporation since they won’t have a break on the first $250,000 of gains going forward. For individuals, it only makes sense to do so if you expect the gains to be larger than $250,000. You also need to weigh the cost of realizing the tax earlier than anticipated and in a sense “pre-paying” your taxes. We recommend speaking with a financial advisor to determine what’s best for your unique situation.