Case study: a hypothetical 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 it has been rumoured for a while that this could be changing, potentially going as high as 75%. Here is how that would look:
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 $600,000 fair market value, leaving Bob with a $400,000 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 today:
- Capital Gain: $400,000 ($600k – $200k)
- Capital Gain Inclusion Rate: 50%
- Taxable Capital Gain: $200,000 ($400k @ 50%)
Bob would report a $200,000 taxable capital gain on his 2021 tax return. If his marginal tax rate is 50%, Bob would be paying $100,000 in tax on the sale of his cabin (assuming he has no capital losses to offset with).
By the same above example, if the Capital Gain Inclusion Rate was increased to 75%, here are the numbers for Bob:
- Capital Gain: $400,000
- Capital Gain Inclusion Rate: 75%
- Taxable Capital Gain: $300,000 ($400k @ 75%)
Bob would face a $300,000 taxable capital gain on his tax return, resulting in $150,000 of tax owing (based on the same 50% marginal rate and above parameters).
So, in summary, a 25% increase in the Capital Gains Inclusion Rate would result in an extra $50,000 of tax owing on the sale of Bob’s asset.
Capital Gains apply to real estate (outside of principal residences), coins, jewelry, antique cars, stocks, or other assets that appreciate in value.
While this potential tax change is not guaranteed, nor would it necessarily be permanent, Canadians should be aware of it and understand the tax implications it could have on their appreciating assets.
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.