Increase in capital gains tax: Will you have to pay?

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Framed as a way to help young people buy their first home by making older, wealthier Canadians pay more taxes, the federal government plans to change the capital gains tax on June 25, raising the inclusion rate to 50 at 67 percent on earnings over $250,000 for individuals.

The government said the changes will affect the richest 0.13 per cent of Canadians, or 40,000 people each year, and about 12 per cent of the country’s corporations. It is expected to generate $19.3 billion for the government over the next five years.

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But what does that mean in British Columbia, where real estate has historically been seen as a good investment, even for those who don’t consider themselves among the country’s wealthiest?

Here’s what you need to know about the tax increase:

What is capital gains tax?

The tax is calculated when someone sells an investment. That can include real estate like land and buildings, or securities like stocks and bonds.

Simply put, capital gains are the difference between the purchase price and the sale price of the investment.

In British Columbia, where real estate values ​​have skyrocketed in a short time, many homeowners will realize significant capital gains by selling a property that is not their primary home.

An inherited property, such as a family cabin, may also be taxable if it was not the owner’s primary residence when he or she died or, in the case of a primary residence that was inherited by a child, when the child sells it.

What is changing?

The federal government is proposing to change the capital gains inclusion rate (the portion of profits that are subject to tax) from 50 percent to 66.7 percent on profits over $250,000 in a year for individuals. Amounts less than $250,000 will be taxed at the previous rate of 50 percent.

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The tax does not apply to primary residences.

Why is the government increasing the tax?

In the recent federal budget, the Liberal government said the current capital gains tax rate creates an unfair tax disparity, because the richer you are, the more your income is made up of gains that are not fully taxed.

That’s why they proposed reducing the tax-exempt amount from half to about a third of capital gains.

At a recent news conference in Saskatchewan, Prime Minister Justin Trudeau defended the change with an argument based on “intergenerational justice.”

“I understand that there are those who have been very, very successful with the way the system used to be and they don’t want the system to change,” he said. “Young people currently make up the majority of our workforce and if they don’t see paths to success, it’s the entire economy that suffers.”

Asked about critics who claim the change will hurt Canadians who bought real estate as an investment for their retirement, Trudeau said he understands the concern about people with vacation homes, but “young people still can’t buy their residences.” principals”.

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The tax changes come as the federal government plans to spend billions of dollars to boost Canada’s housing supply and social programs.

Who will be affected by the change?

While government documents claim the changes will affect only the wealthiest 0.13 per cent of Canadians, Fraser Valley lawyer Aman Bindra said middle-class British Columbians have historically viewed real estate as a smart investment.

“Some people prefer it to the stock market,” he said.

KSW Lawyers has received a flood of calls since the tax changes were announced from clients asking what it will mean for them. Some may be “looking to unload” investment properties before June 25.

But Bindra said the opposite could also happen. The tax rate increase could cool the housing market if people decide to hold onto properties to avoid the tax.

“We may not know the impact of these policy changes for a few years,” he said, including BC’s new investment tax in his assessment.

Rob Greene, managing broker at LandQuest, a British Columbia real estate company that specializes in ranch, waterfront and investment properties across the province, said he hasn’t seen people rushing to put secondary properties on the market, although “presumably that’s what they think might happen.” happen.”

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He said some people may not have assimilated the changes, which are still two months away, but as the date approaches that could change.

Two other BC real estate companies specializing in vacation homes contacted by Postmedia News said they had not noticed an increase in listings either.

Who opposes?

The government has faced criticism from business owners and groups who fear the tax increase could curb business investment in Canada.

The Canadian Medical Association is concerned this will put more pressure on doctors, who do not have a pension and may have investments for their retirement.

Many in the technology sector have signed a open letter written by the Council of Canadian Investors calling on the government to remove the tax increase.

But the federal government has continually defended it as a way to make “the wealthiest Canadians pay their fair share.”

With files from Postmedia News

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