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By Clarrie Feinstein | Business Reporter
April 29, 2024
The reaction from most of financial adviser Jason Heath’s clients has been concern and confusion since the federal government announced an increase in the capital gains inclusion rate, a change that would give many Canadian’s who own a second property a bigger tax bill when they decide to sell.
The budget unveiled on April 16 included an increase in the capital gains tax for people who make more than $250,000 in profit on the sale of an asset. For some, it can be a big financial hit — such as people who sell or inherit a family cottage that was bought decades ago and is now worth much more — but there are certain strategies and advice to navigate the upcoming tax change, financial advisers say.
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“There have been so many changes from the Ministry of Finance in the last year,” said Heath, managing director of GTA-based Objective Financial Partners. “There’s just a lot of confusion. It’s been a frustrating tax year for anyone in the industry.”
What is the capital gains tax and what’s changed?
A capital gain is the difference between an asset’s initial cost and the price upon its eventual sale, said Heath. That asset can be a stock, investment property or cottage — stocks in your RRSP or TFSA are excluded. If someone bought a cottage for $800,000 and sold it for $1 million, they would have a capital gain of $200,000.
Currently, 50 per cent of capital gains are taxable, meaning the individual who sold their cottage and made a capital gain of $200,000 would only be taxed on $100,000.
The change proposed would raise the inclusion rate to 66.67 per cent on capital gains above $250,000 for individuals. That means for the first $250,000 in capital gains, an individual taxpayer would still pay tax on 50 per cent of the asset’s gain but every dollar beyond $250,000 would be two-thirds taxable, Heath said. It’s important to note that if a couple sells a property, each person would get the 50 per cent inclusion rate on the first $250,000 — meaning together they would only pay two-thirds when their profit exceeded $500,000.
Also any renovations and upgrades to the property impact the capital gains. So if the cottage cost $500,000 and there was a $100,000 renovation, the cost base would become $600,000, which reduces the capital gain as the cost of the property is higher, Heath said.
For corporations and trusts, all capital gains regardless of amount will be taxed at the two-thirds inclusion rate. If adopted the new rules come into effect on June 25.
Which property do you make your primary residence?
After June 25, in Ontario, at the top marginal tax bracket, if someone’s capital gain was $300,000 the increase in their taxes would be almost $4,500. If the capital gain is around $1 million, the individual pays around $67,000 more tax, according to calculations by Aaron Hector, private wealth adviser at CWB Wealth in Calgary.
“It’s important to understand that when you own more than one personal property you have a choice on which to claim as the principal residence,” Hector said. “Many assume it only applies to the place they sleep in most nights throughout the year, not fully understanding that a cabin or vacation property could also qualify.”
In that case, it makes sense to claim the principal residence exemption on the house that has the most significant gain, he added.
“If one property has a gain of $50,000 but the other has a gain of $1 million it would be unwise to burn it on the place that doesn’t have a large gain.”
However, it’s important to run the numbers with a financial adviser, he says, as there’s a “sneaky” tax called the alternative minimum tax. Essentially, this tax, which has been in place for decades, ensures that high income earners who would otherwise pay a lower amount of tax than what the government deems reasonable because they have a number of tax preference items — such as capital gains, stock options, various deductions and credits — pay a minimum amount of tax for the year. But changes to that tax came into effect on Jan. 1, 2024 impacting home sales on investment properties.
“The result of the change in the alternative minimum tax is that it will impact fewer people overall, but they’re much more punitive on large transactions, like the sale of a home,” Hector said. “So if people decide to sell before June 25, they could be caught in this other tax change.”
Don’t rush into selling
“There’s not a lot of time before June 25 but it’s important to not rush into selling the property unless you’re already in the final stages of putting it up for sale,” said Ian Calvert, vice-president and principal at Toronto-based HighView Financial Group.
“If there’s a known need for capital and there’s a big expense coming up and you need to raise funds which will incur a capital gain, then trying to get ahead of the deadline could be favourable for a fixed expense.”
However, it’s not advisable to rush into selling a property if the intent was to keep it for many years to come, he said.
“If there isn’t a great need for capital in the short-term it’s not advisable to sell long-term investments solely for tax purposes.”