New capital gains tax changes could have massive impact on family cottages

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Posted By: jasabacklink April 18, 2024

Canadians looking to sell their cottages might consider doing so before the end of June. On Tuesday, Finance Minister Chrystia Freeland tabled a somewhat controversial 2024 federal budget, announcing that the capital gains tax on annual amounts over $250,000 will rise on or after June 25

A capital gains tax is a type of tax that you pay when you sell a property for more money than you originally paid for it. The government notes that, currently, Canadians only pay taxes on 50 per cent of their capital gains, and that this advantage is more pronounced in Canada than in any other G7 country.

To make Canada’s system “more fair”, Freeland proposed an increase in taxes on capital gains, which would likely affect the wealthiest 0.13 per cent of the population with an average income of $1.42 million.

“[T]he inclusion rate—the portion of capital gains on which tax is paid—for capital gains for individuals with more than $250,000 in capital gains in a year will increase from one-half to two-thirds,” the government noted in a statement, adding that individuals with less than $250,000 in capital gains from the sale of cottages, investment properties, or stocks beyond the limits of tax-sheltered savings vehicles will continue to benefit from the current 50 per cent inclusion rate.

For example, right now, if a high-income individual living in Toronto with a $400,000 salary sells a second property and gains $300,000 from the sale, then under the current rules, they pay income tax on 50 per cent—$150,000—of that.

If they have the same gain after the new changes are implemented, they will then pay tax on $158,333 of the gain. To break this down—on the first $250,000 of the gain, the capital gains rule remains the same—50% is taxable (so from $250,000, $125,000 is taxable), and for any gain above $250,000, two-thirds is taxable (there’s an extra $50,000 gain, so two-thirds of $50,000 means that $33,333, is taxable) = $158,333.

Because this individual’s high income puts them in the highest marginal tax rate, the change to capital gains taxation will cost them $4,461 more in the combined federal–provincial income tax.

“Next year, 28.5 million Canadians are not expected to have any capital gains income, and 3 million are expected to earn capital gains below the $250,000 annual threshold,” the government noted in their statement, “About 12 per cent of Canada’s corporations would face the higher inclusion rate on their capital gains.”

Individuals selling their principal residence will continue to be exempt from the taxation, so if you own a cottage, some suggest making it your principal residence at the time of sale if it offers the greater tax break.

Still, the new tax changes have generated a divide across social media, with many investors against the proposed changes and some praising it.

Freeland also announced that Ottawa will spend $52.9 billion more than planned over the next five years, including $8.5 billion in new spending for housing, $6 billion toward the Canada Disability Benefit, $1 billion toward a national school food program, and $500 million for youth mental health. The tax increase will seemingly help pay for some of the new spending.