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Upcoming Changes to Canadian Capital Gains Tax in 2024: Implications for Investment Property Owners

Updated: Jun 21


capital gains tax increase

As June 25th, 2024 approaches, significant changes to the Canadian capital gains tax regime are on the horizon. These changes, poised to reshape the financial landscape for investors, particularly those holding investment properties, are causing a stir among stakeholders. This article delves into the specifics of the new tax regulations and their implications for investment property owners


 


Understanding the Changes


The Canadian government has proposed modifications to the capital gains tax aimed at increasing revenue and addressing income inequality. Among these changes is the adjustment of the inclusion rate—the portion of capital gains subject to taxation. Currently, 50% of capital gains are taxable, but starting June 25th, 2024, this rate will increase to 66.67%.


Impact on Investment Property Owners


Investment property owners are likely to feel the brunt of this change. When a property is sold, the capital gain—the difference between the sale price and the property's adjusted cost base (ACB)—is subject to taxation. With the inclusion rate rising, a larger portion of these gains will be taxed, leading to higher tax liabilities for property owners.


Example Scenarios


To better understand the financial impact, let's consider two scenarios under the current and upcoming tax regimes.


Current Tax Regime


- Property Purchase Price (2014): $400,000

- Selling Price (2024): $700,000

- Capital Gain: $300,000


Under the current tax regime:


- Taxable Capital Gain (50% of $300,000): $150,000

- Assumed Marginal Tax Rate: 30%

- Tax Payable: $150,000 x 30% = $45,000


Upcoming Tax Regime (2024)


- Property Purchase Price (2014): $400,000

- Selling Price (2024): $700,000

- Capital Gain: $300,000


Under the new regime:

- Taxable Capital Gain (66.67% of $300,000): $200,010

- Assumed Marginal Tax Rate: 30%

- Tax Payable: $200,010 x 30% = $60,003


Comparative Analysis


In this example, the tax payable under the new regime is $60,003, compared to $45,000 under the current system. This represents a significant increase of $15,003 in tax liability, underscoring the heightened financial burden on property owners.


Strategic Considerations for Investors


Given the impending changes, investors should consider several strategic measures to mitigate the impact:


Review and Adjust Portfolios

Investors may need to reassess their portfolios to determine the optimal timing for selling properties. Selling before the new rules take effect could be advantageous for some.


Utilize Principal Residence Exemption

Where possible, investors might benefit from designating properties as principal residences for part of the ownership period to reduce taxable gains.


Engage in Tax Planning

Consulting with tax professionals to explore avenues such as deferring sales or exploring other tax-efficient investment structures can be beneficial.


Consider Similar Strategies

Investors should talk to their realtor and solicitor to explore all available options, including strategies akin to the U.S. 1031 exchange, which allows for the deferral of capital gains tax by reinvesting in similar properties.


 

The upcoming changes to the Canadian capital gains tax inclusion rate represent a pivotal shift for investment property owners. The increase from a 50% to a 66.67% inclusion rate will substantially elevate the tax burden on capital gains from property sales. As illustrated, the financial implications are significant, necessitating strategic planning and timely action. Property owners and investors should proactively seek professional advice to navigate this new landscape effectively, ensuring that their financial decisions align with the evolving tax regulations.

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