Capital Gains Tax Increase Impacts Some Investors

This year’s budget went off without much fanfare, save for one thing: capital gains taxes are heading higher. Starting June 25, the change applies to:

• Individuals who realize more than $250,000 in gains in a year. That would apply to those who have non-registered investment accounts or those thinking about selling secondary properties, like cottages and rentals.
• All capital gains reported by corporations and trusts.

If you only hold investments in a Registered Retirement Savings Plan (RRSP) or other registered plan, the new tax rules for capital gains do not affect you.

"There were rumblings of some sort of additional revenue measures, but it was not specifically expected. It's hardly a comprehensive tax increase, but it may work its way down to more middle-class Canadians and in a number of subtle ways," says Eric Lascelles, Chief Economist for RBC Global Asset Management, as there were rumblings about more taxes on higher-income individuals. 

The move is expected to raise $19.4 billion in taxes over the next five years for the Canadian government.

What are capital gains? How are they taxed?

Capital gains refer to the money made on a stock or other asset when you sell it.

For example, say you made $300,000 from the sale of stock you hold in a non-registered account.

Under the old tax rules: you would pay tax on 50% of your $300,000 gain, or $150,000. To calculate the tax you owe, you will add $150,000 to your reported income on your income tax return.

Under the new tax rules: you will still pay tax on 50% of your gains up to $250,000. But you'll now pay tax on 66.7% of any gains above that amount. This means you will now add about $158,350 to your reported income.

"It will affect a fairly small group, but it will still have an impact," says Lascelles, adding that the government estimates about less than one per cent of Canadians will be subject to this tax increase.

Impact on estates and cottages

Because of the big increase over the past years in real estate prices, the increase in the capital gains tax could have a bigger impact on those with second homes, such as cottages or other properties, and those who inherit a property.

There are no capital gains taxes on primary residences – if you sell your home for $1 million, that's what you'd get (minus realtor fees and paying off the mortgage, of course). If you sell a second property, you'd see a tax bill for 50% of the capital gains calculated from when you purchased it. Just like with stock, come June, you'll have to pay tax on 50% of the first $250,000 gain and 66.7% on the rest. 

This also applies to estates or inheritances: when you inherit a cottage, the estate must pay capital gains taxes on the increase in value from the time the property was purchased by your loved-one to when they passed away. Taxes are triggered whether the property is sold, or ownership is transferred. It is the same with non-registered investments that have appreciated in value.

"This is an example where people with moderate means could easily have accumulated gains that exceed the $250,000 and realize that gain all in one year," says Lascelles. "So, this could affect a bigger fraction of the population than the government is budgeting for.”

Assessing the new rules

As for how to strategize around the capital gains tax, you may wish to talk to a tax professional to see if the higher rate could impact your portfolio. "The government has talked about taxing the 1%, so perhaps it's not a huge shock where this landed," he says. "But at the end of the day, the capital gains inclusion rate has increased and now investors may be sorting out just what that means for them."