Capital Gains Tax
The Canadian Budget 2024, effective June 25, 2024, is increasing the tax rate on any gains from half to two-thirds for corporations and trusts. For individuals, the rate is increasing on profits exceeding $250,000 made after June 25, 2024.
This means that for individuals, the first $250,000 of capital gains in a year will have 50% included as taxable income, while any gains above $250,000 will have 66.67% included as taxable income. For corporations and trusts, 66.67% of all capital gains will be taxable income.
The $250,000 threshold applies to individuals after considering various factors like current-year losses, losses from previous years used to reduce current gains, and exemptions claimed for certain gains.
What is capital gains tax?
Capital gains tax is the tax you pay when the value of certain assets like stocks, real estate, business assets, and valuable metals, increases beyond what you paid to purchase the asset.
It’s not a separate tax on its own. Instead, the profit you make gets added to your total income and taxed along with your regular income tax.
Currently, when you have capital gains, only half of that profit is counted as part of your income for tax purposes. This is called the capital gains inclusion rate, and it also applies to losses.
Types of assets subject to capital gains tax
The following types of assets are subject to capital gains tax in Canada after the Budget 2024 changes:
- Stocks, bonds, mutual funds, and other investment securities
- Real estate properties, including rental properties, cottages, and land (excluding principal residences)
- Precious metals like gold and silver
- Business assets such as equipment, inventory, and intellectual property
- Cryptocurrency and other digital assets
Capital gains on inheritance
Assets such as stocks, real estate, valuable metals, and business assets are subject to capital gains taxes. If you inherit any of these assets, there is no tax at the time of inheritance because Canada has no inheritance tax.
That being said, when someone passes away, any assets they owned will be considered to be “sold” on their date of death, and the estate would be required to pay capital gains on those assets.
For example, if you own a secondary residence like a cottage, and you purchased it for $750,000 in 2020, and you pass away in July 2024 when the cottage is worth $1.1M, your estate will be required to pay capital gains tax on the $350,000 gain.
Because of the principal residence exemption, if you inherit real estate and it is a primary place of residence, you will not owe capital gains tax if you sell it later on. But if you inherit property and sell it for a profit without it being your primary residence, then the rules of capital gains tax apply.
How to avoid/reduce capital gains tax?
You may not be able to fully avoid paying capital gains tax, but there are strategies you can use to reduce what you owe:
Option 1: offset your capital gains with capital losses
Remember, capital losses offset capital gains. If you have both capital gains and capital losses in the same tax year, use the losses to offset the capital gain. If you only have a capital loss, and you don’t have capital gains from the prior three years that you could put it towards, you can carry those capital losses forward to offset any future capital gains.
Option 2: put your earnings/ investments in a registered account
Tax shelters are legal ways to shield your investments. As long as your investments remain inside of them, you can buy and sell stocks at your leisure, with no tax consequences. Examples of tax-sheltered investments include registered plans such as an RRSP, TFSA, LIRA, and RESP. If you have any of these, you don’t have to worry about their capital gains or losses until you withdraw your funds.
Option 3: donate assets to charity
When you donate to a registered charitable institution, you receive a tax receipt that allows you to get a credit for a portion of your donation from income tax owing. Instead of donating in cash, you can also transfer ownership of stocks to the registered charity (an “in- kind” transfer). This way, you rebalance your portfolio without triggering a capital gain, because you are not selling the stock but simply transferring ownership.
Option 4: claim the principal residence exemption
Residential properties are considered an “asset” and are therefore subject to capital gains tax. There is one big exception to this rule. It’s called the principal residence exemption. A home that has served as your principal residence is exempt from capital gains tax, as long as it meets the following criteria:
- You own the home either alone or jointly with another person.
- You have designated the property as your principal residence with the CRA.
- You, your spouse, your common-law partner or your kids inhabited the home in each year for which the exemption is claimed.
- You haven’t claimed any other property as your principal residence during any of the years in which the exemption is claimed. You can only have one principal residence in a given year, but it does not have to be used continuously, nor does it have to be the property you occupied most frequently.
Sources:
Understand and Reduce Capital Gains Tax in Canada