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Capital gains tax: How should you prepare for the changes?

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In less than two weeks, some Canadians could see changes to the way their capital gains are taxed.

The Liberal government on Monday introduced changes that Finance Minister Chrystia Freeland described as a “defining measure” to deliver tax fairness. On Tuesday, the House of Commons approved the changes, which are set to go into effect on June 25.

Capital gains are the proceeds from the sale of an asset like a stock or an investment property. Currently, all capital gains come with an inclusion rate of 50 per cent, meaning half of the profits realized from the sale are added to taxable income in that year.

Under the Liberals’ changes, that inclusion rate would rise to 67 per cent on any gains realized above $250,000 annually for individuals. That two-thirds inclusion rate would apply to all such gains made by corporations and many trusts.

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Capital gains tax debate rages in Parliament: ‘Promising to tax, borrow and spend us into fairness’

Who is affected?

The government has said this will only affect a very small, typically wealthy segment – 0.13 per cent of Canadians.

John Oakey is vice-president of taxation at Chartered Professional Accountants of Canada (CPA Canada), an organization representing the chartered accountants in the country. He told Global News that while it is true that very few Canadians will be affected, to say that “only 0.13 per cent” will be affected is not quite accurate.

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“There are life events that can happen with individuals that can push people above the $250,000 annual threshold. So that’s really the issue,” he said.

Oakey said this could be life events such as the sale of a rental or vacation property or the death of a person with a significant estate.

Should you sell your property?

Oakey said a question one should consider is when to sell their property.

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“Would it be more beneficial to sell it before June 25th, or would it be OK to sell it after June 24th?” he said.

A major exemption in the new measures is for capital gains made on the sale of a primary residence.

“All Canadians will continue to pay no capital gains tax when they sell their principal residence. Any money you make on the sale of your home is yours,” Freeland said on Monday.

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Toronto-based real estate lawyer Zachary Soccio-Marandola said this exemption is crucial.

“If you are selling your own property that you live in … this change does not affect you,” he said.

However, he said certain property owners could feel the pinch.

“If you own a secondary property like a cottage or rental property, and you go and sell it and you do have a capital gain, well then this may affect you,” he said.

For example, Soccio-Marandola said anyone who bought a secondary property for $400,000 and sold after June 25 for, say, $700,000, would make a capital gain of $300,000, which would put them over the threshold limit.

He added that even in that case, the tax increase would be marginal. The two-thirds inclusion rate would only apply to any amount above the threshold. This means, they would be taxed on 50 per cent of the first $250,000 and two-thirds of the rest of the $50,000.

“In that example, you’re looking at a change of about $4,500 more in taxes. So it’s not a huge thing,” Soccio-Marandola said.

“What I’ve been telling my clients is a lot of times it’s not a big enough difference to force you into a market where you don’t need to sell.”

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He said that while most property sales were unlikely to result in a capital gain of over $250,000, it could happen in instances where someone is selling a property after several decades, where the value has appreciated significantly over the years.

Oakey said, however, there may not be enough time left to plan the sale of their property.

“There might not be enough of a timeframe to actually do anything before the effective date of this change. That’s probably one of the difficult discussions that individuals in that situation are going to have. What can I possibly do with two weeks left?”

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Plan your retirement and estate

Oakey said Canadians who manage large estates will have to get down to some planning.

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“When you pass away, if you don’t have a surviving spouse, all your assets are deemed disposed of in one year,” he said. “If you had some rental properties or cottage or some other properties, some stock, some shares … those would all be deemed disposed of in the year of your death.”

He said when that happens, a person’s capital gains get condensed into one year, which could put them over the $250,000 annual threshold limit.

Oakey added that people should also look to plan their assets for retirement.

“(For people) getting ready to liquidate those assets, especially their property assets, there’s less than two weeks until June 25.”

Click to play video: 'Canada’s new capital gains tax: What you need to know'
Canada’s new capital gains tax: What you need to know

What should small businesses do?

For corporations and most trusts, there is no threshold limit. All capital gains realized will be taxed at two-thirds, instead of half. While opposing the changes to the tax in Parliament, Conservative Leader Pierre Poilievre on Tuesday called the measure a “job-killing tax on health care, homes, farms and small business.”

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However, there are some exemptions available for small businesses under the changes. The Department of Finance in a statement Monday said the changes would include increasing the lifetime capital gains exemption to $1.25 million, from the current amount of $1,016,836 on the sale of small business shares and farming and fishing property.

Oakey recommended reaching out to a tax adviser to confirm whether your small business qualifies for the exemption.

“As long as you have an active business and you meet this very specific criteria, then when you sell your shares of your business up to $1.25 million, the capital gain will be sheltered,” he said.

Budget 2024 also included the Canadian Entrepreneurs’ Incentive for some Canadian-controlled private corporations. Oakey said the criteria for this measure is very narrow in scope and will only apply to a handful of small business corporations.

“If you qualify for the Canadian Entrepreneurs’ Incentive, half of the inclusion rate will be applicable. So, if 50 per cent is the (general) inclusion rate, then only 25 per cent becomes your inclusion rate. If two-thirds is the inclusion rate, then half of that would become your inclusion rate,” he said.

He said family, farm or fishing corporations could also be eligible for capital gains exemptions, including from the sale of fishing or farming land.

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