The federal government’s new capital gains inclusion rates mean that, in certain circumstances, Canadians will now be paying more tax on their gains from capital asset transactions. For many investors, this will be a game – and net gain – changer. Here is a quick overview of the key changes, some scenarios demonstrating how the changes might impact various types of transactions and taxpayers, and strategies to consider to help minimize the impact.
Capital changes – overview of capital gains inclusion rate changes
Prior to June 25, 2024:
Individuals, trusts and corporations that realized capital gains during the tax year – whether through holdings (stocks, bonds, mutual funds) in non-registered investment accounts, or secondary properties, such as cottages and investment properties – the capital gains tax inclusion rate was 50%.
Starting June 25, 2024:
Individuals:
- Net capital gains greater than $250,000 in a year: Individuals who realize more than $250,000 in net capital gains in a year – whether through holdings (stocks, bonds, mutual funds) in non-registered investment accounts, or secondary properties, such as cottages and investment properties, the net capital gains tax inclusion rate is now 66.6% (or 2/3rds).
- Net capital gains up to $250,000 in a year: For individuals with gains up to $250,000, the net capital gains tax inclusion rate remains at 50%.
Trusts and corporations:
- For all net capital gains reported by trusts and corporations (regardless of whether it is an operating, holding or professional corporation), the net capital gains tax inclusion rate is now 66.6% (or 2/3rds).
Note: The 50% inclusion rate on net capital gains up to $250,000 is not available to corporations and trusts after June 24, 2024.
What’s not changing?
-
For individuals with net capital gains under $250,000, the net capital gains tax inclusion rate will remain at 50%.
- If you hold investments in a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or other registered plans, the new tax rules for capital gains do not affect you.
- The changes do not impact your primary residence capital gains exclusion – this remains in place, and there are no plans to change this at the present time.
Casting a wider net – the higher net capital gains inclusion rate could result in lower net returns on capital asset transactions
The federal government’s decision to increase the net capital gains inclusion rate is designed to generate more tax revenue to meet spending priorities. The higher inclusion rate means that in the case of sales or deemed sales of capital assets, your net, post-tax returns will decline. While the up-to-$250,000 inclusion rate for individuals will allow for some management of capital gains realization to reduce or eliminate the impact of the increase above $250,000 (i.e., staggering the timing of sales), it is on higher-dollar sales or deemed dispositions of capital assets that the impact will be felt the most, and which are consequently less likely to offer ways to reduce the impact through various strategies.
What is a capital gain?
When you sell an asset or investment for more than its adjusted cost base (ACB), that difference is your capital gain. The ACB is calculated using the purchase price of the asset plus any expenses to acquire it, such as commissions and legal fees, and any additional investments or reinvested distributions made into the asset over time. The value of a capital gain is treated as income in the year in which you realized it. Capital gains have preferential tax treatment, as only a portion of the gain is taxable.
Let’s take a closer look at two scenarios of these differences:
Scenario #1: Sale of non-registered mutual funds
Transaction details:
- Purchase price/ACB of mutual funds (see sidebar for explanation of ACB): $100,000
- Proceeds of sale of mutual funds: $500,000
- Net capital gain: $400,000 (value of sale – ACB/$500,000 - $100,000)
Calculation of taxable capital gains and net impact of new inclusion rate on an owner’s tax bill:
Individual
Taxable capital gain:
- First $250,000 @ 50% inclusion rate = $125,000
- Amount above $250,000 (or $150,000) @ 66.6% inclusion rate = $99,900
- Total capital gain included in taxpayer’s income: $224,900
- Net impact of new capital gain inclusion rates vs. prior inclusion rates: $24,900 ($224,900 - $200,000)
Tax bill:
- Present tax paid on capital gain (assuming 40% tax rate): $89,960 ($224,900 X 40%)
- Prior tax paid on capital gain (assuming 40% tax rate): $80,000 ($200,000 X 40%)
> Net difference in taxes: +$9,960
*The applied 40% tax rate is for illustrative purposes only and may vary widely depending upon your unique tax circumstances and your province or residence.
Trust or corporation (including operating, holding or professional)
Taxable capital gain:
- Taxable capital gain included in income @ 66.6% inclusion rate: $266,400 ($400,000 X 66.6%)
- Net impact of new capital gain inclusion rates vs. prior inclusion rate (50%): +$66,400 ($266,400 - $200,000)
Tax bill:
- Present tax paid on capital gain (assuming 50% tax rate*): $133,200 ($266,400 X 50%)
- Prior tax paid on capital gain (assuming 50% tax rate*): $100,000 ($200,000 X 50%)
> Net difference in taxes: +$33,200
*Most trusts pay the top marginal federal and provincial tax rate on their income. Corporations vary to a far greater extent, and so the trust-related tax rate is used in this illustration.
Scenario #2: Sale of cottage/non-primary residence or investment property
Transaction details:
- Purchase price/ACB of property (see sidebar for explanation of ACB): $250,000
- Proceeds of sale of property: $1,500,000
- Net capital gain: $1,250,000 (value of sale – ACB/$1,500,000 - $250,000)
Calculation of taxable capital gains and net impact of new inclusion rate on an owner’s tax bill:
Individual
Taxable capital gain:
- First $250,000 @ 50% inclusion rate = $125,000
- Amount above $250,000 (or $1,000,000) @ 66.6% inclusion rate = $666,000
- Total capital gain included in taxpayer’s income: $791,000
- Net impact of new capital gain inclusion rates vs. prior inclusion rates: +$166,000 ($791,000 - $625,000)
Tax bill:
- Present tax paid on capital gain (assuming 40% tax rate): $316,400 ($791,000 X 40%)
- Prior tax paid on capital gain (assuming 40% tax rate): $250,000 ($625,000 X 40%)
> Net difference in taxes: +$66,400
*The applied 40% tax rate is for illustrative purposes only and may vary widely depending upon your unique tax circumstances and your province or residence.
Trust or corporation (including operating, holding or professional)
Taxable capital gain:
- Taxable capital gain included in income @ 66.6% inclusion rate: $832,500 ($1,250,000 X 66.6%)
- Net impact of new capital gain inclusion rates vs. prior inclusion rate (50%): +$207,500 ($832,500 - $625,000)
Tax bill:
- Present tax paid on capital gain (assuming 50% tax rate*): $416,250 ($832,500 X 50%)
- Prior tax paid on capital gain (assuming 50% tax rate*): $312,500 ($625,000 X 50%)
> Net difference: +$103,750
*Most trusts pay the top marginal federal and provincial tax rate on their income. Corporations vary to a far greater extent, and so the trust-related tax rate is used in this illustration.
Please note: The above scenarios are for illustration purposes only, are simplified, and may not reflect your unique transactional and tax circumstances. Please consult your tax advisor before taking any action based on the above information.
Easing the pain – strategies to reduce the impact of the new inclusion rates
As the scenarios above demonstrate, few if any individual taxpayers who are disposing of capital assets after June 24, 2024 and generating net capital gains above the annual $250,000 threshold will avoid paying more on their tax bill because of the increase in the capital gains inclusion rates – and the impact will clearly be felt for trusts and corporations.
To lessen the blow, here are a few strategies to consider and discuss with your Investment Counsellor and tax advisors, if applicable:
- Realize capital gains under $250,000 threshold – If you have a portfolio of investments with large, accrued gains, consider disposing of your investments slowly over time to ensure you keep your capital gains realized below the $250,000 annual threshold.
- Charitable donations – There’s a tax incentive for those who donate certain publicly traded securities. In-kind donations of these securities made to a qualified donee are entitled to an inclusion rate of zero. As such, if you have appreciated securities, you may wish to consider donating these securities to a charity instead.
- Maximize the available room in your registered accounts – As income earned in registered accounts such as RRSPs, Tax-Free Savings Accounts (TFSAs) or Registered Education Savings Plans (RESPs) are not subject to tax, ensure you’ve maximized your contributions to these accounts, as appropriate.
- Consider gifts to family members – Consider gifting amounts to family members where they have not yet maximized their contribution amounts to their own registered accounts. For example, you may gift funds to your spouse or adult children and grandchildren and have them contribute those funds to their own TFSA. Normally, if you gift funds to your spouse, the attribution rules apply so that all the income earned, and capital gains realized on those funds will be attributed back to you and taxed in your hands. However, there’s an exception for TFSA and the attribution rules will not apply to income earned and capital gains generated within these accounts that’s derived from such contributions.
- Maximize future income splitting – If you have a spouse who earns less income than you or other family members with little to no income, you may want to consider implementing an income splitting strategy. Income splitting shifts income that would otherwise be taxed in your hands at a high marginal tax rate to your lower-income spouse, children or other family members to take advantage of their lower marginal tax rates.
- Split the bill – If an asset is held jointly by two individuals (i.e. spouses) and the asset is sold, the $250,000 threshold applies to each individual. So, assuming attribution rules do not apply, when a jointly held asset is sold, each individual would recognize their proportionate gain or loss on the sale. For example, if a couple owns an asset jointly and equally, and they sell the property realizing a gain of $500,000, $250,000 will be taxed in one spouse’s return at 50%, and the other $250,000 will be taxed on the other spouse’s return at 50% (assuming there are no other capital gains realized in the year).
Caveat venditor (seller beware) – don’t turn a gain into a loss
Please keep in mind that each individual, corporation and trust is unique and must consider their own circumstances to best manage the new, higher inclusion rates. Importantly, and again, please ensure that you speak to your Investment Counsellor and/or your tax advisor first before taking any action that may result in a capital gain be realized – or deemed to have been realized for tax purposes – as no one wants to get caught in today’s larger inclusion net if it isn’t necessary.
Past performance is not indicative of future results. Counsellor Quarterly has been prepared for use by RBC Phillips, Hager & North Investment Counsel Inc. (RBC PH&N IC). The information in this document is based on data that we believe is accurate, but we do not represent that it is accurate or complete and it should not be relied upon as such. Persons or publications quoted do not necessarily represent the corporate opinion of RBC PH&N IC. This information is not investment advice and should only be used in conjunction with a discussion with your RBC PH&N IC Investment Counsellor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest information available. Neither RBC PH&N IC, nor any of its affiliates, nor any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. This document is for information purposes only and should not be construed as offering tax or legal advice. Individuals should consult with qualified tax and legal advisors before taking any action based upon the information contained in this document. Some of the products or services mentioned may not be available from RBC PH&N IC; however, they may be offered through RBC partners. Contact your Investment Counsellor if you would like a referral to one of our RBC partners that offers the products or services discussed. RBC PH&N IC, RBC Global Asset Management Inc., RBC Private Counsel (USA) Inc., Royal Trust Corporation of Canada, The Royal Trust Company, RBC Dominion Securities Inc. and Royal Bank of Canada are all separate corporate entities that are affiliated. Members of the RBC Wealth Management Services Team are employees of RBC Dominion Securities Inc. RBC PH&N IC is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / ™ Trademark(s) of Royal Bank of Canada. RBC, RBC Wealth Management and RBC Dominion Securities are registered trademarks of Royal Bank of Canada. Used under licence. © RBC Phillips, Hager & North Investment Counsel Inc. 2024. All rights reserved.