[Summer 2024 GPS] New Capital Gain Rules

The 2024 federal budget released last April, introduced new capital-gain rules that will affect many Canadians. The date that these rules came into effect was June 25, 2024. Before diving into the changes, let us briefly revisit what capital gains are. Capital gains arise when you sell a capital asset, such as stocks, mutual funds, real estate, or other investments, for more than the original purchase price. The difference between the sale and purchase prices constitutes the capital gain, which is subject to taxation.

Before June 25, 2024, 50% of capital gains were taxable for all individuals and businesses. For example, let us see how John Smith will be taxed in the following example: John bought shares of a public-traded company in his non-registered account in 2022 for $15,000 and sold them in March 2024 for $25,000. The gain is $10,000, and 50% of the capital gain ($5,000)will be added to John’s other income of $45,000 on the 2024 tax return and taxed according to the tax rate, as follows, assuming he is a resident of Ontario:

Capital Gain	$10,000
Taxable Capital Gain (50% inclusion)	$5,000
Other Income	$45,000
Total Income	$50,000
Average Tax Rate	14.09%
Federal & Provincial Tax payable	$7,043

Chart 1

Now, after June 25, 2024, the budget proposed different rules, which can be summarised as follows:

• For individuals with capital gains under $250,000, the tax inclusion rate will remain 50%.
• For individuals with capital gains over $250,000, the inclusion rate will increase to 66.67% (2/3).
• The capital gains tax inclusion rate for all corporations and trusts will increase to 66.67% (2/3).

 

We will focus in this article on individuals, and therefore, we will go back to the above example and update it to explain the changes. Let us assume John Smith bought his shares for $100,000 and sold them for $380,000, making a total gain of $280,000. Let us see how this gain is taxed before and after June 25, 2024.

 

	Before June 25, 2024	After June 25, 2024
Capital Gain	$280,000	$280,000
Taxable Capital Gain	$140,000	$145,000
Other Income	$45,000	$45,000
Total Income	$185,000	$190,000
Average Tax Rate	31.63%	32.06%
Federal & Provincial Tax payable	$58,508	$60,922

Chart 2

The calculations in Chart 2 above for the gains realized before June 25, 2024, are like the previous example in Chart 1. However, the gains after June 25, 2024, in chart 2, are different to reflect the new rules. As mentioned above, for the first $250,000 of capital gains, a taxpayer would continue to pay tax on only 50% of the gain, and for every dollar above $250,000, two-thirds would be taxable. So, for $280,000 of realized gains after June 25, 2024, the taxable capital gain is calculated as follows: $250,000 * 0.5 + ($280,000 - $250,000) * (2/3) = $145,000.

It should be mentioned that the 2024 federal budget preserved the current exemption for capital gains from the sale of a principal residence. Additionally, it preserves the current lifetime capital gains tax exemption for selling small business shares and agricultural and fishing property. The new budget suggests that the exemption be raised to $1.25 million and indexed to inflation in the future.

Taxpayers who receive a property as a gift or inherit it from their family and subsequently sell it may be subject to a higher capital gains tax rate. However, this may be subject to change based on the profit amount and whether the property is converted into a primary residence. In our following newsletter, we will discuss this topic in detail.