The federal Budget 2024, delivered April 16, 2024, proposes significant changes to the capital gains tax.

When an individual, business or corporation sells an investment for more than they bought it for, the profit is capital gains.

For example, an investment can include assets such as:

• a cottage or an investment property
• stocks
• bonds
• mutual funds

The capital gains tax doesn’t apply to the profit earned by individuals through the sale of their primary residence or earned profit from tax-sheltered RRSPs or RESPs. 

Currently, 50 per cent of capital gains are taxable. 

Your client bought a ski cabin as a second home or an investment for $500,000 and later sold it for $700,000, seeing a $200,000 profit. They're taxed on 50 per cent of the $200,000 profit or $100,000, which is added to their income. 

The federal budget proposes to increase the capital gains inclusion tax rate as of June 25, 2024:

• for individuals, the first $250,000 of capital gains will continue to be taxed on 50 per cent of their capital gains. For capital gains exceeding $250,000, the inclusion rate is 66.67 per cent.
• for corporations and trusts, the inclusion rate will increase to 66.67 per cent from 50 per cent for all capital gains.

Your client bought a ski cabin as a second home or an investment for $500,000 and later sold it for $800,000, seeing a $300,000 profit. They'll be taxed at a rate of 50 per cent on $250,000 of profit and at a rate of 66.67 per cent on $50,000. The higher rate applies to every dollar above $250,000 in capital gains.

Principal residence: if your client inherits their parents’ principal residence as a beneficiary, your client will be exempt from the capital gains tax when the title transfers.

Not a principal residence: if your client inherits a vacation home or an investment property as a beneficiary from their parent(s) and it wasn't a principal residence, and your client sells the property, they must pay capital gains if the value of the property has increased.

For a business, the capital gains tax is charged on the difference between the cost of establishing the business and the sale price.

Currently, the lifetime capital gains exemption lets Canadians exempt up to $1,016,836 in capital gains on the sale of small business shares and farming and fishing property.

This tax-free limit will increase to $1.25 million on June 25, 2024, and will continue to be indexed to inflation.

To encourage entrepreneurship, this incentive will reduce the inclusion rate to 33.3 per cent on a lifetime maximum of $2 million in eligible capital gains.

Combined with the enhanced lifetime capital gains exemption, when this incentive is fully rolled out, entrepreneurs will have a combined exemption of at least $3.25 million when selling all or part of a business.

The proposal would increase the average federal–provincial marginal tax rate on capital gains above $250,000 of someone earning $1 million a year, to 35.7 per cent.

For corporations and trusts, the capital gains tax inclusion rate is increasing to 66.67 per cent from 50 per cent.

Transitional rules will apply to taxation years that begin before June 25, 2024, and end after June 24, 2024, such that capital gains realized before June 25, 2024 would be subject to the 1/2 inclusion rate and capital gains realized after June 24, 2024 (net of any losses) would be subject to a 2/3 inclusion rate.

Changes are effective June 25, 2024. For tax years beginning before and ending on or after June 25, 2024, transitional rules will apply. Additional details will be released in the coming months.