Capital Gains Fact Sheet
We’re changing the inclusion rate on capital gains to make our tax system fairer. Why? We don’t believe that an investor should pay lower taxes than an employee.
Quick facts:
You will not pay capital gains when you sell your principal residence
There are no changes to your RRSPs, TFSAs, or registered pensions. These savings are tax exempt in Canada
Nothing changes if you make a capital gain less than $250,000 on your investments
No increases to taxes on employment income
Inheritances remain tax free in Canada
New exemption rates for entrepreneurs, farmers, and small businesses making them better off on up to $6.25 million
The only people who will pay more are those individuals or businesses that are fortunate enough to make more than $250,000 in capital gains in a year on their investments (that’s very few Canadians).
Undoubtedly capital gains can be a complex issue. However, I’ll make it very clear. We are working to make our tax system fairer.
What are capital gains?
Capital gains are the profits that are passively earned by selling an investment, such as stocks, bonds, business shares, or real estate.
Inclusion rate?
The inclusion rate is the portion of a capital gain that is taxed. Under the current tax system, the inclusion rate is set at one half. This means that only half of the income earned on the sale of an asset can be taxed.
What is changing?
We’re raising the inclusion rate from one half to two thirds for capital gains exceeding $250,000.
66% inclusion rate on capital gains above $250,000
I.e.: a capital gain of $300,000
1/2 of $250,000 is taxed
2/3 of remaining $50,000 is taxed
2. We’re introducing a new $250,000 annual threshold (per person).
Only 1/2 of gains below this threshold will be taxed.
3. We’re increasing the Lifetime Capital Gains Exemption from $1 million to $1.25 million. Small business owners and shareholders can be tax exempt on $1.25 million of capital gains.
4. We’re introducing a new $2 million Canadian Entrepreneurs’ Incentive which will offer entrepreneurs in critical sectors a new lifetime partial exemption where they will only pay tax on one third of capital gains on capital gains up to $2 million.
With these changes entrepreneurs won’t start paying any more tax until they make capital gains that exceed $6.25 million.
Examples:
Some examples might help put the changes into perspective.
The Kanata North Start-up
Louise founded a start-up in Kanata North in 2015. Her start-up is doing well and when she sold a portion of her company’s shares to a partner-investor in 2022 she realized a $1 million capital gain. Pre-Budget 2024 rules permitted her a $1 million Lifetime Capital Gains Exemption – with this sale she’s exhausted her lifetime exemption.
In the August of 2025, Louise plans to sell more shares to this partner-investor, which will leave her with a capital gain of $350,000. With the pre-budget 2024 tax law, Louise would have to pay income tax on 1/2 of this $350,000 ($175,000). Budget 2024 raises the ceiling for the Lifetime Capital Gains exemption to $1.25 million – giving Louise an extra $250,000 on which she is not taxed.
Since Louise also qualifies for the new Canadian Entrepreneurs’ Incentive—which in 2025 will provide an inclusion rate of 1/3 on $200,000 of eligible capital gains—Louise will only pay tax on one third of the remaining capital gain $33,333 (33 per cent of the remaining $100,000).
The bottom line: Louise is paying less tax than she would have under the old tax system. She will only start paying more tax under the new laws if and when she realizes a capital gain above $6.25 million.
Note: The Canadian Entrepreneurs’ Incentive will grow by $200,000 each year until it reaches a maximum exemption amount of $2 million in 2034.
The Sale of Secondary Properties
Cottage 1:
Marge and Mike bought a small cottage outside Renfrew in 1992 for $100,000. Since then, they’ve put in $50,000 to improve the place (new roof, replaced the water pump & built a new dock). Today, the cottage is worth $550,000 and they plan to sell. This will leave them with a capital gain of $400,000 ($200,000 each). Marge and Mike are each below the yearly threshold of $250,000 and will not pay a penny more in tax than they would have prior to the changes.
Note: Each owner is eligible for a $250,000 threshold before they begin paying more taxes.
Cottage 2:
Two brothers, Cam and Dave, helped their dad build a family cottage in the Rideau Lakes in 1964. In 2007 when their dad passed, they inherited the family getaway which was then valued at $250,000. Since then, Cam and Dave have brought the 20th century cabin into the 21st century with major renovations (screened-in-porch, built a bunkie, updated the kitchen). These renovations as well as other ownership expenses cost them $200,000. Now, they’re each looking to retire and plan to sell it for $1.1 million in 2024. This will leave them with a capital gain of $650,000.
When they sell the cottage, 1/2 of the first $500,000 will be taxed. 2/3 of the remaining $150,000 will also be taxed. Because of the changes to the tax system, roughly $350,000 of their total $650,000 capital gain is taxable income compared to $325,000 now.
If we assume that Cam and Dave are at the top of the marginal tax rates in Ontario, the additional combined federal-provincial taxes owing on this $1 million sale with a $650,000 capital gain would be at most $13,250 between the two of them or 6,625 each. This represents around 2 per cent of the realized capital gains.
Note: Less than $14,000 in new tax on the sale of a $1.1 million cottage.
Inheritances:
Inheriting cash:
Ethan is 29 and eager to buy his first home. His grandfather, a 90-year-old veteran, passes away and leaves him $400,000. Inheritances are tax-free in Canada. Ethan will not pay any tax on this inheritance after Budget 2024 changes.
Note: Inheritances remain tax free in Canada
Inheriting a principal residence:
Nicole’s uncle Ian recently passed away and left his house in her name. Ian bought the house for $250,000. It has since risen in value to $1.4 million, meaning that the capital gain on the property is $1.15 million. Because principal residences are exempt from capital gains, Ian’s estate won’t owe a penny in capital gains taxes on this property. Nicole will inherit the property at its fair market value of $1.4 million.
If Nicole decides to make this property her principal residence, she will be able to sell it in the future without paying any capital gains tax.
Note: Individuals don’t pay capital gains taxes on the sale of primary residences.
Inheriting a principal residence and making it a secondary residence:
If Nicole decides not to make the inherited property her primary residence and opts to sell, she will pay capital gains tax on the increased value since she took ownership. If by the time Nicole sells the property, it has increased in value by $275,000, Nicole will pay tax on 50% of the first $250,000 and 66% of the remaining $25,000. If Nicole earns a salary that puts her in the top marginal income tax bracket in Ontario (53.53 per cent), she would owe just $2,230 more in tax—0.3 per cent of the total property value.
Want to know more? Visit the Government of Canada Website.
