The federal government’s proposed change to capital gains taxes is expected to increase taxes on investments.
After unveiling plans to spend billions of dollars to boost Canada’s housing supply and social programs, the federal government is framing its plan as a fair way to offset those investments and prevent younger generations from inheriting a larger deficit. .
“I understand that for some people this may cost more if they sell a cabin or a secondary residence. But young people still can’t buy their primary residence,” Prime Minister Justin Trudeau told reporters Tuesday in Saskatchewan.
Here’s what you need to know about the change to capital gains tax.
What is changing?
In a bid to make wealthy individuals and corporations pay more taxes, the federal Liberals said they will increase the capital gains inclusion rate — the portion of capital gains that is subject to tax: 50 percent to 67 percent. The change will apply to those with more than $250,000 in capital gains in a year starting June 25. All corporations and trusts will also have to pay taxes on a larger portion of their profits.
The government said the change will affect the richest 0.13 per cent, about 12 per cent of Canada’s corporations, as well as Canadians with an average income of $1.42 million.
It is also increasing the lifetime exemption limit for agricultural and fishing property and small business stocks.
What is capital gains tax?
Capital gains tax is the tax people pay when selling a capital asset or property. Capital gains are the profits from that sale. Common types of capital properties include country homes, securities (such as stocks, bonds and mutual fund units), land, buildings and equipment used in a business or rental operation, according to the company’s website. Canada Revenue Agency.
How much pay?
Canadians must report taxable capital gains as income on their tax return. Under the Liberals’ new plan, the capital gains inclusion rate would increase from 50 per cent to 67 per cent for those with more than $250,000 in capital gains in a year.
A capital gain is the difference between the sales price and the total purchase price of a property, including acquisition costs and any expenses incurred on the sale.
Capital Gains Example
This example uses the current capital gains inclusion rate which requires half of the capital gains to be taxed. If you sold an asset for $500,000, with a purchase price of $100,000, your capital gain is $400,000 and your taxable capital gain is $200,000.
Once the new 67 percent rate takes effect on June 25, the capital gains tax will be higher for amounts over $250,000, but amounts $250,000 and below will be taxed at the old 50 percent rate. hundred.
How does the capital gains tax affect homeowners?
Many Canadians could feel the impact of this tax change, for example through the sale of their cabins and other secondary residences, or rental properties.
“I think even middle-class Canadians could be dramatically affected by this,” Leah Zlatkin, a mortgage broker and LowestRates.ca expert, said in a video interview with CTVNews.ca. “If you look at the appreciation and property values over the last three or four years, there are several people who bought cabins pre-COVID when cabins were very cheap. And now, if you were to sell that same cabin, the cabin would no longer be exists. up to four times, five times its value.”
You realize a capital gain when you sell your home, according to the CRA website. You do not have to pay taxes on the gain if the property was solely your primary residence for each year you owned it. A primary residence applies to a house, cabin, condominium, apartment in an apartment building or duplex, trailer, mobile home or houseboat in which a person habitually resides.
In addition to people who purchased second homes for recreation or to earn additional income, some affected by the change may have purchased these properties as part of their retirement plan. You can only designate one home as your primary residence each year.
John Fincham, a broker with Re/Max Parry Sound Muskoka Realty in Muskoka, Ont., recently told BNN Bloomberg that the change could prompt a correction in the market for cottages and recreational properties. Some homeowners may rush to sell before the higher tax rules take effect amid rising property values in recent years.
He said it could also affect estate planning. “I get a lot of calls, mostly from people trying to keep (the cabins) in the family,” she said.
What are the criticisms?
Many Canadian business owners and entrepreneurs fear that change could impede innovation.
The Canadian Medical Association also opposes the change to capital gains taxes. The group is concerned that the tax increase’s effect on many doctors’ retirement investments will add “financial strain” to doctors who don’t have a pension to rely on. He said many doctors incorporate their medical practices and invest for their retirement within their corporations.
Trudeau and his deputy Chrystia Freeland defended the move, saying the current tax system means a nurse, a student or a carpenter could be paying income taxes at a higher marginal rate than a billionaire who can use accountants to pay a tax. lower tax.
The Liberals said the change will not affect 99.87 per cent of Canadians and does not apply to the sale of primary residences. It is expected to raise $19.3 billion over the next five years.
With files from Rachel Aiello and Spencer Van Dyk of CTV News, BNN Bloomberg and The Canadian Press