New Capital Gains Tax
What is it?
Capital gains tax is a tax on the profit realized from the sale of an investment. This investment can include real estate (such as land and buildings) or securities (such as stocks and bonds). Essentially, capital gains are the difference between the investment’s purchase price and its sale price.
How Capital Gains Tax is Applied
When someone sells an investment, the capital gain is calculated as the sale price minus the original purchase price. This gain is then subject to taxation. For example:
- Real Estate: In places like BC, where real estate values have risen significantly, selling a property (that is not your primary home) can result in substantial capital gains.
- Inherited Property: An inherited property, such as a family cottage, can also be subject to capital gains tax. If the inherited property was not the deceased owner’s primary residence or if the property becomes the primary residence of the inheritor and is later sold, the gains realized will be taxed.
Recent Changes to the Capital Gains Tax —
Changes Effective June 25, 2024
● Inclusion Rate Increase: The federal government raised the inclusion rate from 50% to 67% for gains over $250,000 for individuals. This means a larger portion of your capital gains will be subject to taxation.
Rationale for the Increase
The Liberal government argued that the prior capital gains tax rate created an unfair tax disparity. Wealthier individuals often have a significant portion of their income coming from capital gains, which are not fully taxed. By increasing the inclusion rate, the government aims to reduce this disparity and ensure that wealthier Canadians pay a fairer share of taxes.
Key Points to Remember
- Impact on Sellers: Those selling high-value investments or properties that are not their primary residence may see a significant increase in their tax liability due to the higher inclusion rate.
- Real Estate in B.C.: Given the sharp rise in property values, many homeowners in B.C. might realize substantial gains, leading to higher taxes under the new rules.
- Inherited Properties: Properties inherited but not used as a primary residence will also be subject to the increased capital gains tax when sold.
By understanding these changes, individuals can better prepare for the financial implications of selling investments or properties and plan accordingly.
