While the Liberal government says higher taxes in the 2024 budget are intended to make the super-rich pay for hiked-up spending, ordinary Canadians are going to be impacted as well as they sell real estate, stocks, and other assets, say financial experts.
Since the Liberals presented their financial plan on April 16, the hottest topic for economists, accountants, and ordinary citizens has been the plan to tax a greater portion of investment profits through the higher so-called “inclusion rate” on capital gains. The new capital gains tax starts on June 25, and many low-income earners expecting a one-time gain of over $250,000 are trying to decide whether to do it now.
Currently, individuals pay tax on 50 percent of their capital gains. The change will mean paying tax on 50 percent of the first $250,000, and on 66.7 percent for any amount above that.
Businesses will go from being taxed on 50 percent of their capital gains to being taxed on 66.7 percent.
The Liberals are also raising the lifetime capital-gains exemption, and making other adjustments for entrepreneurs.
It isn’t only the wealthy who are targeted. Even individuals with low or no income who book a one-time gain exceeding $250,000 will be affected.
Many of them are now scrambling to decide if it makes sense for them to sell before the changes take effect, which could affect not only their taxes but also the supply of housing.
Anyone whose parent or spouse dies also risks seeing a higher tax bill if the estate is targeted by the policy change.
The Liberals are counting on the highest capital-gains taxes in decades to finance their increased government program spending and soaring debt load. It was former Liberal Prime Minister Chrétien’s government that lowered the inclusion rate to 50 percent in 2000, where it has remained until now.
What Is Changing?
- The Liberals plan to raise taxes on capital gains for individuals and corporations.
- The Liberals announced the planned changes on April 16 as part of their proposed budget.
- If the budget is approved, the changes take effect on June 25.
Definitions
- Capital gains are profits earned after selling capital assets or property such as a home or cottage, and financial products such as stocks, bonds, and mutual funds. If money is lost on the sale, a capital loss is incurred.
- The inclusion rate is the portion of the profits that the government deems taxable.
- The profit is treated as income, so more income tax must be paid on it.
Who Is Targeted
- Individuals
- Current Law: You pay income tax on 50 percent of your capital gains.
- Beginning June 25, if the proposed budget becomes law: You pay income tax on 50 percent of your capital gains up to $250,000, and on 66.7 percent of capital gains over that amount.
- Corporations and Trusts
- Current law: Pay tax on 50 percent of capital gains.
- Planned law: Pay tax on 66.7 percent of capital gains.
Who Is Exempt
- People selling their primary residence.
- People booking gains from funds in a Registered Retirement Savings Plan, Tax-Free Savings Account, Tax-Free First Home Savings Account, or other registered savings vehicle.
Example
Let’s say you make a theoretical profit of $300,000 from selling a second home and some stocks.If you close the deal before the tax changes, you’d pay income tax on 50 percent of the capital gain, or on $150,000.
If you close the deal after, you’d pay income tax on 50 percent of the capital gain up to $250,000, or on $125,000. Then you’d also pay income tax on 66.7 percent of the remaining $50,000, or on $33,333. This means you’ll pay income tax on $158,333, rather than on $150,000 under the current law.
In their budget documents, the Liberals gave an example for someone earning $400,000 a year and paying the highest marginal tax rate. Under the planned changes, the individual would pay an additional $4,461 in federal and provincial income tax.
