Capital Gains Tax Increases: What You Need to Know
If your job pays your bills, don't worry about the increase in the capital gains inclusion rate.
The 2024 Federal Budget has proposed increasing the capital gains inclusion rate for individuals, trusts, and corporations. Currently, the capital gains inclusion rate is 50%. This inclusion rate means that unlike employment income, where 100% is taxable, only 50% of the gain from selling assets such as cottages, investment properties, stocks, or mutual funds is subject to taxation.
Beginning on June 25, 2024, capital gains from the sale of these assets will increase to 67% and be included in your taxable income. However, to provide some relief, the federal budget has proposed that capital gains up to $250,000 realized by an individual, either directly or indirectly through a trust or partnership, will remain subject to the 50% inclusion rate each year.
Why are the rich folks “screaming mad”?
The Canadian government has proposed increasing taxes for older, wealthier citizens to help young people buy their first homes. This move will generate $19.3 billion in revenue over the next five years. However, even though the new tax increase will only affect 12% of corporations and 0.13% of individuals, there has been a lot of backlash.
The primary concern is that this tax increase could discourage entrepreneurs from starting businesses in Canada and lead to a loss of workers in the tech sector, as they may try to avoid paying additional taxes when they cash in on stock options.
It's important to understand that capital gains are derived from buying and selling an asset for more than its original price. This type of income is passive, meaning that it is earned without the need for active work. In other words, passive income allows you to earn income while sleeping.
Why these capital gains won’t matter to you?
If you get to know me, you will know I LOVE passive income.
Here are a couple of ways I want you to earn passive income without being affected by the recent change to the capital gains inclusion rate:
You can earn passive income from your investments in your tax-sheltered accounts such as RRSPs, RESPs, TFSAs, etc. These tax-sheltered accounts do not incur any taxes on the capital gains while they grow. You can benefit from tax-free growth in these accounts to make even more passive income. For any gains not in these accounts, you can control the timing of the capital gains so that you do not cross the $250K line in any year.
You can earn passive income from the sale of your primary residence. Any capital gain on the sale of your primary residence is tax-free in Canada. You can use that money to buy investments to generate more passive income. Suppose you own an investment property or recreational property. In that case, you will face a tax hit on the sale of the property as the capital gains inclusion rate will increase for capital gains exceeding $250,000. Amounts under $250,000 will be taxed at 50 percent.
You can earn passive income from the sale of your small business. When you sell the shares in your business, you may realize a capital gain. If that business qualifies for the existing lifetime capital gains tax exemption, the new budget proposes to increase that exemption to $1.25 million and index that figure to inflation after that. Any amounts after that threshold would be taxed at 67 percent.
Even after the inclusion rate rises to 67%, capital gains will still be taxed lower than ordinary income from employment, freelancing, interest income, and rental properties. However, some prefer capital gains to be taxed like all other income and then tax all income less. This tax fairness is a debate for another day…
The bottom line is that unless you're extremely wealthy, you can remain calm about these capital gains tax changes. Your passive income goals are still very achievable.
What are you ready to do to earn more passive income?
Leave a comment below and let us know.
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Until then, let’s stay connected — to ourselves and each other.
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