Case study: analyzing the June 2024 change to the Capital Gains Inclusion Rate
Capital Gains Inclusion Rate
The Capital Gains Inclusion Rate has been at 50% for the last 2 decades, but effective June 24, 2024, it has been increased to 66.67%. For individuals, the higher inclusion rate only takes effect on annual gains in excess of $250k, with the 50% inclusion rate on the first $250k. For trusts and corporations, there is no $250k threshold, every $1 of gain is taxed at the new 2/3 inclusion rate. Here is how that would look for Bob:
Bob owns a cabin in the B.C. interior (not his principal residence), purchasing it for $200,000 many years ago. The cabin has since appreciated to a $1,200,000 fair market value, leaving Bob with a $1,000,000 unrealized gain. Before we look at the numbers, here is how Capital Gains get calculated:
Capital Gain x Capital Gain Inclusion Rate = Taxable Capital Gain
So, if Bob were to sell his cabin prior to June 2024 under the old rules:
- Capital Gain: $1,000,000 ($1.2m – $200k)
- Capital Gain Inclusion Rate: 50%
- Taxable Capital Gain: $500,000 ($1m @ 50%)
Bob would report a $500,000 taxable capital gain on his tax return. If his marginal tax rate is 50%, Bob would be paying $250,000 in tax on the sale of his cabin (assuming he has no capital losses to offset with and excluding disposition expenses).
By the same above example, under the new rules effective June 24, 2024, here are the numbers for Bob:
- Capital Gain: $1,000,000
- 50% Capital Gain Inclusion on the first $250,000: $125,000
- 66% Capital Gain Inclusion on the remaining $750,000: $500,000
- Taxable Capital Gain: $625,000 ($125k + $500k)
Bob would be faced with a $625,000 taxable capital gain on his tax return, resulting in $312,500 of tax owing (based on the same 50% marginal rate and above parameters).
So, in summary, the change in the Capital Gains Inclusion Rate would result in an extra $62,500 of tax owing on the sale of Bob’s asset.
Capital Gains are applicable on assets such as real estate (outside of principal residences), coins, jewelry, antique cars, stocks, cryptocurrency or other specific assets that appreciate in value.
While this potential tax change has become law, it remains to be seen if future governments will repeal it. The Capital Gains Inclusion Rate has bounced around over the last 50 years in Canada.
For more information, please speak to Jeff Graham, reachable at (604) 363-7549 or jeff@firstoakfinancial.ca.
DISCLAIMER: this commentary is provided for general informational purposes only and does not constitute financial, insurance, investment, tax, legal or accounting advice.