Capital gains inclusion rate: 2024 federal budget
Published on May 23, 2024
It's now official. As of June 25, 2024, the capital gains inclusion rate will be increased to 66.7% for the portion exceeding $250,000. This means that owners of second homes and rental properties can expect to pay more in taxes when they resell them.
Although this announcement has made headlines, its impact on the housing market should be limited. Here's what you need to know.
Summary:
- Recent changes to the Income Tax Act
- What is a capital gain?
- How are capital gains taxed?
- The impact for sellers
- The 2 impacts for buyers
Recent changes to the Income Tax Act
Recent changes to the Income Tax Act, effective June 25, 2024, introduce significant changes to the taxation of capital gains.
The inclusion rate will remain at 50% for the first $0 to $250,000 of capital gains. This new measure will increase the inclusion rate to 66.7% for gains in excess of $250,000 annually. First passed by the federal government, this measure will also be adopted by Quebec.
Owners of affected homes will need to be aware of the consequences of these changes and consider appropriate strategies to minimize the impact on their financial situation.
Given the potential consequences, it is advised to consult qualified professionals for advice on how best to manage your transactions in the wake of this announcement.
Is it too late to sell before this law takes effect?
If a homeowner puts their second home or rental property up for sale now, does this give them enough time to sell before the legislative change comes into force?
Although deadlines are tight, it's still possible to put your property on the market before June 25. However, in the current climate, the market for second homes and rental properties is affected by interest rates. You'll probably need a competitive price to get your property on the market by then. So it's important to do the math to see if the savings are really worth it.
Will the announcement of this change discourage buyers?
This new measure should not dampen the spirits of buyers. Remember that capital gains were taxable at 75% 25 years ago.
For the owner-occupier The objective of the purchase is to occupy a dwelling and reduce costs with the income generated by the other dwellings. When the time comes to sell, he or she will not pay capital gains tax on the share of the building he or she occupies (principal residence).
For the investor The aim is to collect a monthly rental income. The surplus tax he or she will pay on the capital gain realized on sale is likely to be minimal compared to the profits derived from the investment.
For buy-and-sell transactions It's unlikely that someone will realize a capital gain of more than $250,000 on a buy-and-sell (flip) transaction, if you look at the purchase cost of the property and the renovations. In general, therefore, it won't apply to this situation (unless that person realizes other capital gains elsewhere).
Exemptions
The most notable exemption from capital gains taxation for real estate is the principal residence: it is exempt. To qualify, the property sold must have been used as a principal residence. Farming and fishing estates are also exempt.
What is a capital gain?
Capital gain is the profit (or surplus value) obtained from the sale of a capital asset such as land, real estate, stocks or bonds, and so on.
Calculating capital gains
To determine the capital gain, we calculate the difference between the sale price and the purchase price of the property. For example, an owner who bought land a few years ago for $100,000 and sells it this year for $150,000 realizes a capital gain of $50,000 ($150,000 - $100,000 = $50,000).
In the case of a building on which rental income is earned, if depreciation is taken on the building as an expense on personal income tax returns, this has the effect of increasing the capital gain to be reported.
How are capital gains taxed?
By law, 50% of the capital gain is taxable. In the above example, the seller will add $25,000 (50% of $50,000) to his or her taxable income in the year of sale. However, if the owner realizes a capital gain of $300,000, 50% of the first $250,000 will be taxable, while 66.7% of the excess, i.e. $50,000 (the difference between $300,000 and $250,000), will be taxable.
The impact for sellers
The impact of changes to the capital gains inclusion rate can be significant for sellers - especially those making substantial profits.
Increased tax payable on capital gains
Vendors with large gains will see a greater proportion of their capital gains taxed.
The 2 impacts for buyers
Changes to the capital gains inclusion rate will also have an impact on buyers:
1. An in-depth analysis
Buyers will need to consider the tax implications of this new measure when evaluating the cost of acquiring a property. This could affect the financial viability of a real estate investment.
2. Long-term financial planning
Buyers will need to adjust their long-term financial planning to take account of tax changes and ensure that they are able to maximize the profitability of their investment while minimizing the tax burden at the time of resale.
Sellers and buyers alike should consult their accountant to assess the impact of this change on their short- and long-term investments and financial objectives. A good understanding of these tax changes is essential.
Are you looking to sell a second home or rental property? With DuProprio, you have access to the visibility and support you need to make your sale a success! Learn more about our services by watching our short video or by calling us at 1 866 387-7677.