Since the increase in the Capital Gains inclusion rate in the recent Federal Budget we have had a lot of questions about Capital Gains on various investments, and how the increase will affect Canadian taxpayers.
What is a capital gain (or loss) on an investment?
In simple terms, a capital gain or loss is the difference between the purchase price and the sale price of an investment. If you sell the investment for more than what you bought it for, it is considered a capital gain, if the value is less than what you bought it for it is a capital loss.
What are the tax implications of capital gains?
If you sell an investment and end up with a resulting capital gain, (you made money), you must pay taxes on that capital gain. Currently, you include half (50%) of the gain in your income and pay tax at your marginal tax rate.
As of June 25, 2024, the Federal Budget proposes to increase the capital gains inclusion rate from 50% to 66.67% for capital gains above $250,000 for individuals. This increased rate will lead to a higher tax liability for Canadians owning assets such as non-registered investments or multiple properties like a cottage or rental property; when it comes time to sell. It is important to note, the 66.67% increase only affects the portion of the capital gain that exceeds $250,000. Here is an example:
Cottage purchase = $150,000
Cottage sale price = $800,000
Capital Gain = $650,000
Currently, the taxable portion of the capital gain is $325,000. (650,000 x 50%)
After June 25th the taxable portion of the gain will be calculated as follows:
Inclusion rate 50% on first $250,000 = $125,000 (250,000 x 50%)
Inclusion rate 66.67% thereafter = $266,680 (400,000 x 66.67%)
Total taxable Capital Gain = $391,680 (125,000 + 266,680)
This is an increase of $66,000 that you would have to pay tax on, at a 53% rate it equates to almost $35,000 in additional tax owing on the sale.
Using Capital Losses to Offset Capital Gains
If you have lost money on an investment, you have a capital loss; a capital loss can be written off against your capital gains to reduce the amount of tax you owe. Capital losses can only be used to reduce your capital gains, but you can carry them back three years to offset previous taxes paid or carry them forward indefinitely to offset future capital gains.
For more information on your capital gains or losses talk to your tax professional or give us a call.
Have a great weekend!
Tracey & Paige
Photo by Sasun Bughdaryan on Unsplash
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