Canadians pay tax on the income from their job. But currently, they only pay taxes on 50 percent of capital gains, which is the profit generally made when an asset, such as stocks, is sold. This is the capital gains tax advantage.
While all Canadians can benefit from the capital gains tax advantage, the wealthy, who tend to earn relatively more income from capital gains, disproportionately benefit compared to the middle class.
The government is committed to a fair and progressive tax system. By increasing the capital gains inclusion rate, we will tackle one of the most regressive elements in Canada’s tax system. Our government is proud to be reducing this inequity.
As announced in the 2024-25 federal budget, the percentage of capital gains included in income will increase from 50% to 66.6%, effective for gains realized after June 24, 2024.
- The inclusion rate for capital gains realized annually up to $250,000 by individuals will continue to be one-half.
- The lifetime capital gains exemption currently allows Canadians to exempt up to $1,016,836 in capital gains tax-free on the sale of small business shares and farming and fishing property. This tax-free limit will be increased to $1.25 million, effective June 25, 2024, and will continue to be indexed to inflation thereafter.
- The government will maintain the exemption for capital gains from the sale of a principal residence to ensure Canadians do not pay capital gains taxes when selling their home. Any amount you make when you sell your home will remain tax-free.
- To ensure homes are for Canadians to live in, not a speculative asset class for investors, since January 1, 2023, capital gains from property flipping—properties bought and sold within 1 year—have been treated as business income. Exemptions exist for many common life situations; these exemptions will remain. This is central to the promise of Canada.
- To encourage entrepreneurship, the government is proposing the Canadian Entrepreneurs’ Incentive which will reduce the inclusion rate to 33.3 per cent on a lifetime maximum of $2 million in eligible capital gains. Combined with the enhanced lifetime capital gains exemption, when this incentive is fully rolled out, entrepreneurs will have a combined exemption of at least $3.25 million when selling all or part of a business.
The change in the inclusion rate applies to all capital gains realized by corporations and to capital gains realized annually by an individual which exceed a $250,000 threshold.
To ensure this increase in the capital gains inclusion rate is concentrated among the wealthiest, while keeping taxes lower on the middle class, the first $250,000 of capital gains income earned by Canadians each year will not be subject to the new two-thirds inclusion rate. Business owners will have access to this exemption from the increased inclusion rate as individuals.
The following examples of tax-sheltered middle-class savings will not be impacted by reducing the capital gains tax advantage:
- Capital gains from selling your principal residence.
- Income, including capital gains, earned in a tax-sheltered savings account, such as an RRSP, RRIF, TFSA, FHSA, or RESP.
- Pension income or the capital gains earned by the registered pension plans you or your spouse are a member of including your workplace pension plan, and the CPP or QPP.
- Up to $250,000 every year in capital gains from selling a cottage, investment property, or other taxable investments, such as stocks, beyond the generous limits of a tax-sheltered savings account.
If you would like help with dealing with the CRA or would like to know more about taxable benefits, please feel free to call us at (905) 305-9722 or email us at info@eigenmachtcrackower.com and we will help you out!
