Welcome back, friends! Today, we're discussing a topical subject, the significant changes the federal government has proposed concerning Capital Gains Exemption limits. Let us understand these changes and explore their impact on us as individuals.
Before we begin, let's clarify the concept of the ‘Inclusion Rate’. This rate determines the portion of capital gains on which tax is paid. The upcoming changes affecting both individuals and corporations are set to take effect on June 25, 2024.
Existing Capital Gains Scenario (Pre-June 25, 2024)
Currently, homeowners selling their primary residence enjoy a complete exemption from capital gains tax, a policy that will continue unchanged. However, for second properties or investment properties, the inclusion rate currently stands at 50%. This means half of the gains are taxable and added to the individual's income for that year.
New Capital Gains Scenario (Post-June 25, 2024)
Under the new regulations, the inclusion rate for individual taxpayers will increase to 66.7% for gains exceeding $250,000 within a year. Gains up to $250,000 will remain at the 50% inclusion rate. Let us look at two example scenarios and it will make the impact very clear to you.
Example 1:
Imagine an individual bought an investment property for $450,000 in 2010 and is now selling it for $750,000, realizing a gain of $300,000.
• Taxable gains calculation:
• 50% of $250,000 = $125,000
• 67.7% of balance $50,000 = $33,333
Under the new rules, they will have to pay an income tax of $158,333, compared to $150,000 under the current rules.
Example 2:
In our second example. Consider someone who bought an investment property in 2004 for $250,000 and is selling it in July 2024 for $800,000, realizing a total gain of $550,000.
• Taxable gains calculation:
• 50% of $250,000 = $125,000
• 67.7% of balance $300,000 = $200,000
• Total taxable gains under the new rule would be $350,000, compared to $275,000 currently taxed.
Assuming the effective tax rate of the individual is 31%, the new tax liability on the gains would be $108,500, compared to $85,250 previously—a difference of $23,250 on gains of $550,000.
This second example brings the point home and makes it pretty clear, that the changes introduced or effective from June 25th are not that bad how they sound to be when you initially review them and hear in the news portals and outlets.
Impact on Corporations and Trusts: For corporations and trusts, the inclusion rate for all capital gains on asset sales will be 66.7%, applicable to gains realized on or after June 25, 2024.
What This Means for Real Estate
Since the announcement, the real estate market has experienced a slowdown, this we can evidently see in April 2024's market dynamics. While the direct impact of these changes may seem minimal, it will take time for the market to fully absorb and adjust to these new regulations.
The policy shift has undoubtedly dampened market sentiment, already weakened by slow economic conditions over the past few years. Such changes in policy timing could be debated for their effectiveness.
I encourage you to share this information with friends and family who might benefit from understanding these new rules. Also, feel free to comment on any real estate topics you'd like us to cover next.
Wish you all the very best! Reach out to our dedicated team at Elixir for any queries you have in Real Estate, and we will do our best to help.
Mudit Mehta
Broker of Record
ELIXIR REAL ESTATE INC.
Off: 416-816-6001 | [email protected]
