What to know about changes to capital gains taxes in Budget 2024
A new proposal would increase the inclusion rate for capital gains above $250,000 from 50% to two-thirds. If adopted it would be in effect as of June 25 of 2024.
(As of April 30th, the Capital Gains Tax will not be included in the 2024 Budget but teh Government still is commited to presenting it by June 24th with its own legislation)
Selling of primary residence will remain excluded from the capital gains taxes in the proposal.
This would affect the wealthiest as with the current rate they have an advantage over the middle-income households.
An estimated 3 million Canadians are expect to proceeds that exceed $250,000 as oppose to the 28.5 million who would not be any capital gains income next year.
A .13% of Canadians who would have to pay more taxes would be making an average of $1.4 million.
An estimated 307,000 (12.6%) corporations would be affected by the changes.
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What Is Capital Gains Tax?
Capital gains tax can be applied when selling assets like land, buildings, shares, bonds, and real estate investment trust units. Examples of selling capital property include exchanging for another property, settling debts, emigrating, property loss, or gifting. If you earn more from the sale than the purchase price, income taxes are due on the extra profit.
How To Calculate Capital Gains Tax on the Sale of a Property
To calculate the tax amount on capital gains, compare the proceeds of sale to the adjusted cost base. Proceeds are the selling price after deducting expenses, while the cost base includes purchase price and related costs. If proceeds exceed the cost base, it's considered capital gains. In Canada, the inclusion rate is 50%, so half of the gains are added to your total income for tax purposes. Tax is then paid at your marginal rate.
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How To Minimize Capital Gains Tax on Rental Properties
1. Exemption for Principal Residences
If you sell your main home, you need to report the sale, but you might not have to pay capital gains tax if you sell it within 12 months of buying it. Exceptions to this exemption include situations like death, disability, a new job, divorce, or having a new child.
If you didn't live in the home the whole time you owned it, the exemption will only apply for the years it was your main residence.
2. Make a Gift or Inherited Property Your Principal Residence
If you inherit a home or receive property as a gift, it's beneficial to make it your main residence for at least a year before selling. If the property was the primary residence of the person who passed it to you and you make it your primary residence, the estate won't owe capital gains tax when you inherit it. This allows you to sell the property without facing high taxes on the profits.
3. Incorporate Your Rental Property Business
By incorporating your rental property business, you transfer ownership to the corporation, making it the legal owner. When the property is sold, the capital gain is taxed at a lower corporate tax rate, typically saving you money compared to the personal tax rate.
4. Put Your Earnings in a Tax Shelter
By placing the proceeds from the sale into a Registered Retirement Savings Plan (RRSP) or another tax shelter, you can decrease your total taxable income, resulting in a lower tax bill. It is advisable to consult with a tax professional before implementing this strategy.
5. Make Use of the Capital Gains Reserve
You can opt for a reserve if you receive payment for your property over several years instead of all at once. This allows you to report a portion of the capital gain annually. However, you may not claim a reserve if you were not a Canadian resident or exempt from taxes at the end of the tax year or the following year, or if you sold the property to a corporation under your control.
6. Capital Losses Offset
You can use 50% of capital losses to offset capital gains in a given year. If you've incurred losses from selling properties below their cost base, you can apply up to half of these losses to offset gains from other properties. It's advisable to seek advice from a tax expert before implementing this strategy.
7. Carry Forward Your Losses
You can apply a past net capital loss to decrease your taxable capital gain. In Canada, capital losses can be carried forward indefinitely but can only offset capital gains, not other types of income. To check your capital loss balance, log into your myCRA account and access the Carryover Amounts link.
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FAQs About Capital Gains Tax On Property in Canada:
- Reporting Sale of House: You must inform the CRA about selling your house, even at a loss or if it's your main residence. Capital gains tax is only applicable if the property is an investment and you make a profit.
- Deferring Capital Gains Tax: If your property was your principal residence throughout ownership, you can avoid tax on the gain. Utilize past losses or consider a "rollover" to transfer the property.
- Selling Rental Property: Legal exemptions can help avoid capital gains tax on rental property. Strategies include making it your main residence, incorporating the business, or offsetting gains with past losses.
- Tax on Gifted Property: Gifted property is taxable at fair market value in Canada. Inheriting a primary home is tax-free. To sell without capital gains tax, consider making it your primary residence first.
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Canadians have long been able to leverage their RRSPs to finance their first home purchases. Traditionally, the allowable withdrawal from an RRSP for this purpose has been $35,000, with no tax implications. Additionally, individuals were required to commence repayment of this $35,000 within three years of withdrawal.
The Federal budget proposes a temporary increase in the allowable withdrawal amount to $60,000 and extends the repayment grace period from three years to five years. These changes apply to withdrawals made between January 1, 2022, and December 31, 2025, providing Canadians with enhanced flexibility in accessing funds for home ownership.
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Resources:
https://globalnews.ca/news/10427688/capital-gains-tax-changes-budget-2024/
https://www.freshbooks.com/en-ca/hub/taxes/how-to-avoid-capital-gains-tax-on-property