Fair and Predictable Capital Gains Taxation

In Budget 2024, the federal government announced changes to capital gains taxation to make Canada’s tax system fairer.

Starting June 25, 2024, the capital gains inclusion rate will be increased from one-half to two-thirds for capital gains of over $250,000 per year for Canadians, and on all capital gains for corporations and most types of trusts. An increased Lifetime Capital Gains Exemption would ensure most middle class entrepreneurs won’t pay more tax because of these changes, and the new Canadian Entrepreneurs’ Incentive would encourage entrepreneurs to invest in capital-intensive and high-growth sectors. These changes will make Canada’s tax system fairer by making taxation more income-neutral—these changes narrow the tax advantage between capital gains and other forms of income, particularly paycheques.

What’s Not Changing

A fair and predictable taxation environment is important for Canadians planning for retirement and for businesses planning to invest in Canada. To that end, the government is clarifying that forthcoming legislation and Budget 2024 changes to capital gains do not include:

1. Changes to the principal residence exemption. The government is maintaining the principal residence exemption, to ensure Canadians do not pay capital gains taxes when selling their home. Any amount you make when you sell your home will remain tax-free.
2. Tax elections or on paper realizations. A capital gain is normally realized on the disposition of a capital property. With limited exceptions this requires the taxpayer to legally transfer their interest in the property to another person. The current income tax rules do not permit taxpayers to elect to realize a gain or loss on their property without an actual transfer and the government does not intend to introduce such an election.
3. Capital gains averaging over multiple years when the $250,000 annual threshold for individuals has been exceeded. Under the new rules, Canadians with up to $250,000 in capital gains from January 1 through December 31 of each tax year will not pay any more tax; individuals will only pay more tax on capital gains above $250,000. Capital gains cannot be averaged over multiple years to stay under the $250,000 annual threshold.
4. Splitting the individual $250,000 annual threshold with corporations. Under the new rules, individuals cannot share their $250,000 annual threshold with corporations they own. This benefit is strictly for individual taxpayers. Corporations and most types of trusts must include two-thirds of all their capital gains as taxable income.
5. Exemptions for specific assets or corporations. No specific assets or corporations will be exempt from the two-thirds inclusion rate. The two-thirds inclusion rate applies uniformly across all sectors, ensuring fairness and preventing preferential tax treatment.
6. Time-based or other distinctions. There will be no special rules based on how long an asset is held, or other such criteria. The same inclusion rate will apply for all capital gains, regardless of the type of asset or the length of time it was held before selling.

These clarifications ensure that measures to improve tax fairness do not provide new loopholes or uncertainties about the tax system.