Is this True? Canadians Now Have To 66% Capital Gains Tax On All Their Profits Over $250,000
Thursday May 30th, 2024
Recent Changes in the 2024 Federal Budget
The 2024 federal budget (Budget 2024) proposed to increase the capital gains inclusion rate for individuals, trusts, and corporations. Specifically, 66.7% of capital gains realized on or after June 25, 2024, would generally be included in income for tax purposes (this is up from 50%). To provide some relief, the budget proposed that capital gains up to $250,000 realized by an individual—either directly or indirectly through a trust or partnership—will remain subject to the 50% inclusion rate each year.
What is a Capital Gain?
A capital gain occurs when you sell a property for more than its purchase price. The difference between the selling price and the original purchase price is the capital gain. For instance, if you bought a property for $500,000 and sold it for $1 million, your capital gain would be $500,000.
Taxable Capital Gains
In Canada, not all capital gains are taxable. The Canadian tax system includes a mechanism called the "inclusion rate," which determines the portion of the capital gain subject to taxation. The inclusion rate for capital gains up to $250,000 is 50%. However, for capital gains exceeding $250,000, the inclusion rate is 66.7%.
Example: Calculating Taxable Capital Gains
Let’s break down the calculation for a real estate capital gain of $500,000:
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For the first $250,000:
- Inclusion rate: 50%
- Taxable Capital Gain: $250,000 × 50% = $125,000
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For the amount exceeding $250,000 ($250,000):
- Inclusion rate: 66.7%
- Taxable Capital Gain: $250,000 × 66.7% = $166,750
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Total Taxable Capital Gain:
- $125,000 (from the first $250,000)
- $166,750 (from the remaining $250,000)
- Total: $125,000 + $166,750 = $291,750
Thus, for a total capital gain of $500,000 from selling your property, $291,750 would be subject to tax.
Once you have determined the taxable portion of your capital gain, you need to calculate the actual tax owed based on your marginal tax rate. Suppose your tax rate for the year is 30%.
Tax Owed=Total Taxable Capital Gain×Tax Rate $291,750x30% = $87,525
Therefore, with a taxable capital gain of $291,750 and a tax rate of 30%, the tax owed would be $87,525. On a $500,000 gain, paying $87,525 is NOT 66.67%
The taxable capital gain is then added to your total income for the year. The amount of tax you pay on this gain depends on your marginal tax rate, which varies based on your total income and the province or territory where you reside. In Canada, tax rates are progressive, meaning that higher income levels are taxed at higher rates.
Understanding and managing capital gains tax is essential for maximizing your investment returns and ensuring compliance with Canadian tax laws. By knowing the inclusion rate, calculating your taxable capital gain, and determining the tax owed based on your marginal tax rate, you can make informed financial decisions and retain more of your investment earnings.
The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.. Consulting with a tax professional or financial advisor can provide personalized advice tailored to your financial situation, helping you navigate the complexities of capital gains tax effectively.
