Capital Gains Inclusion Rates set to increase in Alberta

Some Canadians are scrambling to sell off capital assets before June 25, 2024, in hopes of avoiding the Federal government’s impending increase to the capital gains inclusion rate. This change to capital gains taxes is aimed at ensuring the wealthiest Canadians (and corporate entities) are paying their fair share in taxes. However, this increase will impact other Canadians, notably those who own multiple homes, rental properties or family farms. Many Canadians have been left wondering exactly how this incoming change will impact their taxable income, and in true legal fashion….it depends.

 

What are Capital Gains?

Capital gains’ are the profits made by an individual or corporation from the sale of an asset. The Canada Revenue Agency (‘CRA’) requires all corporations and individuals to add a portion of capital gains earned, in a taxation year, to their reportable income. Currently, 50% of all capital gains must be reported as taxable income; this is known as the capital gain inclusion rate. Essentially, 50% of all capital gains earned needs to be reported to the CRA as taxable income, which is then taxed at the applicable rate.

For example, if Mrs. Smith purchased a rental property for $100,000 and then sold the same property for $600,000, the sale would generate $500,000 in profit, equating to $500,000 in capital gains. Under the current taxation regime, Mrs. Smith would need to include 50% ($250,000) of the capital gain under her taxable income.

 

Incoming Changes 

On June 25, 2024, the Federal government is implementing a 17% increase to the capital gains inclusion rate for corporations, which will have them paying income tax on 67% of all profits earned through the sale of assets. For individuals however, the changes are slightly less taxing (no pun intended). Where corporations will be held to a 67% capital gains inclusion rate on ALL capital gains, individuals will only be impacted by this increase if they earn more than $250,000 in capital gains annually.

For example, Mrs. Smith from the example above, would now need to consider the increased capital gain inclusion rate, as she made more than $250,000 in profit from the sale of her rental property. However, unlike corporations, she would benefit from the 50% inclusion rate being applied to the first $250,000 in profit (being $125,000 in reportable income) and 67% on the remaining profits (being $167,500 in reportable income). Under the new regime, Mrs. Smith would be required to report $292,500 as taxable income for the year where she would previously only need to report $250,000 as taxable income. Mrs. Smith would be taxed on an additional $42,500 for the exact same transaction under the new Federal tax laws.

 

 

Impact

The impacts of these looming changes will undoubtedly impact corporations and property owners across Canada – but there are a few important things to remember:

  1. Capital gains does not apply to primary residences. If you own one home and this home has been your principal residence for the entire time you have owned the home, any profits made on the sale will be exempt from capital gains tax.
  2. Farmland and fishing properties being sold or transferred may be exempt under the Lifetime Capital Gains Exemption. While qualifying farmland and fishing properties are not wholly exempt from capital gains, the CRA allows a ‘Lifetime Capital Gains Exemption’ which shelters $1,250,000 in capital gains from being considered taxable income. This lifetime exemption can allow aging farmers to pass farmland to their successors without bearing the burden of additional taxes. Any capital gains realized over $1,250,000 would still be taxable under the applicable inclusion rate.
  3. Even ‘gifted’ property is subject to capital gains. Many people are misinformed on gifted land, as they believe it is exempt from capital gains as there is technically no profit made. However, whenever a transfer of land is completed, the assessed value of the property is used to calculate the capital gains where no purchase price has been paid. For example, if Mrs. Smith gifted her rental property to her son, she would still be responsible for reporting the full $292,500 in additional taxable income, as the property is valued at $600,000 regardless of whether she makes her son pay that amount or not.

Capital losses offset capital gains. A capital loss is calculated when a person sells an asset for less than they originally paid for it. For example, if you were to purchase a home for $250,000 and sell the same home for $150,000, there would be a capital loss of $100,000. This $100,000 can be applied to any capital gains in future years to offset the taxes payable.

 

 

How Hayes Fry Law can help you!

At Hayes Fry Law, we have a team of lawyers proficient in estate planning, real estate, and family law. By providing in-depth knowledge in real estate law and estate planning, our team can help you prepare for the future, so there are no surprises later down the road. If you own a family farm, rental properties, corporate shares/stocks, or even a vacation home, at some point in time you or your estate will be responsible for paying capital gains tax relating to these assets, whether they are sold or gifted to another person. We can help you prepare for this transition and structure your estate in a way that minimizes the impact of the legislative changes being implemented June 25, 2024. If you would like more information on capital gains, real estate law, or estate planning we are always happy to chat!

 

Our blog was a response to the news article below:

https://toronto.ctvnews.ca/i-m-not-wealthy-ontario-senior-shocked-she-owes-40-000-in-capital-gains-after-gifting-land-1.6905994