Explaining Capital Gains Changes

It’s become a hot topic of conversation. 

Once changes to capital gains legislation were recently made in the federal budget, there was much confusion over who was affected, how much one would pay, and whether the legislation targeted the right people. 

Let’s get into sorting this out:

1. Profits Before the Legislation – Individuals and Corporations 
2. Profits After the Legislation – Individuals 
3. Exemptions
4. Summary

Profits Before the Legislation – Individuals and Corporations

Prior to the passing of the new legislation, individuals and corporations reported 50% of the profits from the selling of assets when filing their tax returns. 

Note: According to the federal budget, 12.6% of the 2.4M Canadian corporations posted profits from capital gains (2022). 

 

Profits After the Legislation – Individuals

Now that the legislation has passed, individuals must declare 66.67% of their profits above $250,000. For any profits below $250,000 from asset sales, 50% of that amount is taxed. 

The key here is that the 50% and 66.67% are not the tax rates. The tax rate on capital gains (profits from asset sales only) remains 27%.

 

Exemptions

1. Primary residences, small businesses, farmers, and startup companies remain exempted from capital gains. These exemptions have also been expanded.
2. Capital Gains are measured by the acquisition and reselling of an asset. Profits from producing and selling products and services are not included.
3. Capital gains will not rise for entrepreneurs who may be worried that the changes will negatively affect them. This is because of the Canadian Entrepreneurs’ Incentive that lowers the inclusion rate to 33.3%. This exemption will rise to a lifetime maximum of $2M by 2034, but when combined with the lifetime capital gains exemption, that number increases to $3.25M. More information is available here.
4. Capital gains do not apply to the sale of anyone’s primary residence. They only apply if a second property, such as an investment home, cottage, cabin, or other real estate investment, is sold and there is a resulting profit.
5. The existing lifetime exemption for profits from selling a business has been expanded to the first $1.25M.
   • In addition, an entrepreneur’s incentive has been added to amounts above $1.25M from the sale of eligible businesses. 33.3% of profits up to $2M above the tax-free $1.25M will be taxed. This capital gains change will only kick in if capital gains profits surpass $3.5M.

 

Summary

This change in Canada’s Capital Gains legislation means tax is paid on an additional 1/6 of profits from asset sales. That is the difference between 50% and 66.67%. 

According to Finance Canada, this change affects 40,000 tax filers, or 0.13%. This is the official estimate, and implies that this is not a tax change that will affect many Canadians. Many critics of the policy feel that the effects will be much farther reaching, saying it will have an impact on many people such as anyone with a family cottage and incorporated professionals such as doctors. The major concern is that this policy will dampen economic growth and lead to brain drain. 

Are you ready to move to the next stage? Let’s chat. Send me an email (hillary@hillarylane.ca) or text/phone (416-882-4707).

Photo by Tim Gouw on Unsplash