Canada's Capital Gains Tax Gets an Update
Starting June 25th, 2024, how capital gains are taxed in Canada will change. Before we delve into the proposed changes, let’s look at what is capital gains tax.
What is Capital Gains Tax?
A capital gain refers to the profit you make when you sell an asset for more than you originally paid for it. This can apply to a wide range of assets, including stocks, bonds, or real estate (e.g., investment property), etc.
For a long time, Canada applied a flat 50% inclusion rate on a capital gain. This meant that only half of your capital gain was included as taxable income. For example, if you sold an asset and made a gain of $100,000 on that sale, then $50,000 (i.e., 50% of $100,000) would be included in your taxable income. Then, the included $50,000 would be taxed based on your marginal tax rate.
What is Marginal Tax Rate?
Canada uses a progressive tax system with marginal tax rates. This means your tax rate increases as your taxable income increases. What does this mean? Well, this means the tax rate applies only to the portion of your income that falls within that specific tax bracket.
There are different tax brackets for federal and provincial taxes, resulting in a combined marginal tax rate depending on your income and province. The federal tax brackets are based on your taxable income after deductions, while the Ontario tax brackets are calculated after federal tax is deducted.
For example, below is the breakdown of combined federal and Ontario tax rates for the applicable income range in 2024:
2024 Taxable Income Range | Income Tax Rate | Capital Gains Tax Rate |
Up to $51,446 | 20.05% | 10.03% |
$51,446 - $55,867 | 24.15% | 12.08% |
$55,867 - $90,599 | 29.65% | 14.83% |
$90,599 - $102,894 | 31.48% | 15.74% |
$102,894 - $106,732 | 33.89% | 16.95% |
$106,732 up to $111,733 | 37.91% | 18.95% |
$111,733 - $150,000 | 43.41% | 21.70% |
$150,000 - $173,205 | 44.97% | 22.48% |
$173,205 - $220,000 | 48.29% | 24.14% |
$220,000 - $246,752 | 49.85% | 24.92% |
over $246,752 | 53.53% | 26.76% |
Canada's capital gains tax system is undergoing a change effective June 25th, 2024. Here's how it will work:
Individuals:
For capital gains under $250,000, half (50%) will be included as taxable income.
Any capital gains exceeding $250,000 will have two-thirds (66.67%) included as taxable income.
Corporations and Trusts: The portion of capital gains included as taxable income increases from half (50%) to two-thirds (66.67%).
In Simpler Terms:
Imagine selling an asset for a profit (capital gain). Based on the new tax regime, up to a $250,000 gain, you'd add only half the profit to your taxable income. If the profit is higher, the portion above $250,000 would be taxed more heavily.
Corporations and trusts will see all their capital gains taxed at a higher rate.
Remember:
This additional income is taxed at your regular marginal tax rate depending on your province.
It's important to note that these are proposed changes, and the final details could be subject to modification.
It's always wise to consult a tax professional for personalized advice.
The content of this article is intended to provide a general guide for educational purposes only. It does not create a lawyer-client relationship. For your specific circumstances, please contact a specialist.