Understanding the Recent Changes to the Capital Gains Inclusion Rate: What REALTORS® and Their Clients Need to Know
The recently announced changes to the capital gains tax inclusion rate have caused some concern among clients, many of whom have expressed confusion about the changes to their REALTOR®. These client concerns are important, as the change to the Capital Gains Inclusion Rate affects owners of most properties and businesses.
What is the Capital Gains Inclusion Rate?
When individuals sell capital assets like real estate, the profit from the sale is known as a capital gain. The capital gains inclusion rate determines the portion of this gain that is taxable. Prior to the change coming on June 25th, only half (50%) of the capital gain was included in a taxpayer’s income for tax purposes. Principal residences are still generally exempted from tax under the Principal Residence Exemption (PRE).
Upcoming Changes (Effective June 25, 2024)
- For Corporations and Trusts: The inclusion rate will increase from 50% to 66.67% of the capital gain.
- For Individuals:
- The inclusion rate for total annual capital gains exceeding $250,000 will increase from 50% to 66.67%.
- For gains under the $250,000 threshold, the inclusion rate remains at 50%.
Practical Implications for REALTORS® and Clients
- Increased Taxation for Larger Gains: Properties that generate larger capital gains (in excess of $250,000) will see a higher portion of these gains included in taxable income, resulting in higher taxes owed.
- Calculating the $250,000 Threshold: The $250,000 threshold applies per individual. Each owner’s share of the gain will count towards their respective thresholds for properties owned jointly.
- Transition Year Management: For the transition year (2024), gains realized before and after June 25, 2024, will be treated differently. Gains before this date will be taxed under the old rules (50% inclusion rate), and gains after will be taxed under the new rules (66.67% inclusion rate for gains over $250,000).
- Taxation Rules for Flipping Houses: The sale of a house is not necessarily affected by this change to the capital gains inclusion rate, because as of January 1st, 2023 the Canadian Revenue Agency has started treating property flipping income as business income – which is different from capital gains because it is fully (100%) taxable.
Example Scenarios
Example 1: Selling a Property with a $300,000 Gain in 2025
- Before Change: $150,000 (50%) is included in taxable income.
- After Change:
- First $250,000 of the gain: $125,000 (50%) included in taxable income.
- Remaining $50,000: $33,333 (66.67%) included in taxable income.
- Total taxable income inclusion: $158,333.
Example 2: Jointly Owned Property
- If two people sell a jointly owned property and realize a gain of $500,000:
- Each individual’s share is $250,000.
- Each individual’s taxable gain: $125,000 (50%) included in taxable income (no change, as each gain is within the $250,000 threshold).
Long Term Considerations
Since the new rules mean higher taxes for large gains, it’s crucial to consider your overall financial planning strategy. Investors might explore spreading out sales over multiple years or other tax-efficient strategies to manage their tax obligations.
The RAE aims to ensure you have the information you need to guide your clients confidently through these upcoming changes. For further details or specific questions, we recommend consulting with a tax professional.
For any suggested amendments to this article, please reach out to Keean Lehtinen, Government Relations Specialist for the REALTORS® Association of Edmonton, at keean.lehtinen@therae.com.
The information contained in this article is provided from the Government of Canada, and more details are available at the following link: https://www.canada.ca/en/department-finance/news/2024/06/capital-gains-inclusion-rate.html
