The Government of Canada has tabled and passed a “Notice of Ways and Means Motion” (NWMM) in Parliament that proposes to increase the capital gains inclusion rate. The new capital gains inclusion rates will go into effect on June 25, 2024.

Essentially it will mean an increase in the amount of capital gains that are subject to taxation.

For corporations and trusts, the capital gains inclusion rate will increase from one-half (50%) to two-thirds (66⅔ %).
For individuals (including capital gains allocated by a partnership or trust), the inclusion rate will remain 50% for the first $250,000 of capital gains in a taxation year. This would be net of capital losses, including those carried forward or back from other taxation years, and certain specified capital gains. However, capital gains above $250,000, net of the amounts listed above, will be subject to the 66⅔% inclusion rate.

To put this in perspective: previously, if you sold an asset for $500,000, with a purchase price of $100,000, and made $400,000 in capital gains, the taxable component would earlier have been just 50% ($200,000) whether you are an individual, a corporation or a trust.

However, under the new rates, the taxable capital gains of corporations and trusts would now $266,667. For individuals, taxable capital gain for the first $250,000 will be @50%, i.e. $125,000, but for the remaining amount ($150,000) @66⅔%, i.e. $100,000 will be added to taxable income.

The NWMM confirms that taxpayers seeking to recognize accrued capital gains on property at the current one-half capital gains inclusion rate must dispose of that property before June 25, 2024.

Even with the increased capital gain inclusion rate, there are effective strategies to minimize your capital gain tax:

  1. Use tax-free or tax-sheltered accounts (TFSA): The income you earn in a TFSA, regardless of the type of income, is not taxable, even when the gain is realized. Funds withdrawn from a TFSA are also not taxable. The only exception is dividend income from U.S. corporations, which will generally be subject to U.S. withholding tax. Please note, TFSAs have a yearly contribution limit, so anything above this limit would be taxable.
  2. A registered retirement savings plan (RRSP): RRSPs can also help reduce your tax burden. Capital gains earned in an RRSP are not taxable when the gain is realized but rather when the funds are withdrawn. These withdrawals are taxed at your marginal tax rate as ordinary income.
  3. Tax loss harvesting: You can offset capital gains with capital losses. This reduces your overall tax burden and is known as tax loss harvesting. It is possible to carry capital losses backward for up to 3 years to offset against any capital gains, or it can be carried forward indefinitely and accumulated.
  4. Leverage Loans: The interest you pay on money you borrow to earn investment income that pays out interest and dividends are deductible in Line 22100 of your Income Tax return. If you are paying interest on money borrowed to generate business income, then you can deduct it as business expenses on Line 8760 of your T2125 (Statement of Business and Professional Activities). Interest paid on a mortgage cannot be deducted unless this mortgage is paid on a property that is used for business.
  5. Track expenses: It’s a good idea to keep track of any qualifying expenses incurred in securing or maintaining investments. When calculating a capital gain, you can deduct any outlays and expenses from the proceeds of the disposal to determine the net proceeds of the sale. Adjusted cost base (ACB): The amount originally paid for the asset, plus any acquisition costs, such as commissions and legal fees.