How much is capital gains tax in Canada?—and other reader questions answered

The capital gains inclusion rate refers to how much of a capital gain is included in your income for tax purposes. Since 2000, only one-half of a capital gain has been taxable. In that year, the inclusion rate decreased twice from three-quarters to two-thirds to one-half. 

Who is affected by the new capital gains rules?

Taxpayers affected include:

1. Individuals with an annual capital gain of more than $250,000
2. All corporations
3. All trusts

Few people report more than $250,000 of capital gains in a single year. But some Canadian middle-class taxpayers are upset because they may be impacted when they sell a cottage, for example. 

Incorporated business owners and professionals in Canada may save money inside their corporation or within a holding company. This enables tax deferral because corporate tax rates on active business income are lower than if the income was earned personally. Investment income within a corporation is taxed at high rates, though, similar to the top personal tax rates. So, incorporated savers will not be able to accumulate their savings as quickly and will have more tax to pay in retirement. Other Canadian corporations, like publicly traded stocks that investors may own in their investment accounts, mutual funds, or pension plans, will all pay more tax as well.

The impact on trusts may be more limited because when trusts are used for tax savings, their income is often allocated to the beneficiaries of the trust and taxed to them personally. 

Capital gains with employee stock options

It is worth noting that employees in Canada who receive stock options as compensation from their employer may have their option proceeds taxed at a higher inclusion rate as well. The same $250,000 limit applies, with option income over that threshold subject to more tax. The stock option deduction will decrease from one-half of the option gain to one-third over $250,000, so that two-thirds of the gain is included in income.

Capital gains from the sale of a businesses in Canada

The budget also proposed an increase to the lifetime capital gains exemption (LCGE) when selling qualified small business corporations (QSBCs) and qualified farm or fishing properties. The limit would rise from $1,000,000 to $1,250,000 as of June 25. 

A new Canadian Entrepreneurs’ Incentive was also introduced. This incentive would start accruing as of January 1, 2025, in increments of $200,000 to a maximum of $2 million by January 1, 2034. The new entrepreneur exemption would be for founding investors in Canadian-controlled private corporations (CCPCs) to provide additional capital-gains relief for certain business owners.

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Current status of the capital gains tax proposals

Interestingly, the Budget Implementation Act tabled shortly after the budget excluded the capital gains tax changes. Finance Minister Chrystia Freeland insists they are still forthcoming, but it does raise questions about whether there may be further revisions to the initial proposals.

Answering your questions about the new capital gains tax changes

MoneySense received are lots of questions about the capital gains tax changes. We will try to tackle a few of them here. 

Is there a limit on capital gains tax?

Corporations will now have 67% of all capital gains included in income, Harvey, instead of 50%. There is no $250,000 limit, as that number only applies to individuals. Corporations will have a higher inclusion rate on every dollar of capital gains. 

To be clear, the inclusion rate is not the tax rate. The tax rate varies by province and is roughly 50% for a corporation’s passive income. So, if you have a 66.67% inclusion rate and a 50 percent tax rate, you end up with 33.33% tax payable on a capital gain in a corporation. 

This may only seem like an 8.33% tax rate increase, and it is on an absolute basis. But on a relative basis, it means 33% more dollars of tax paid on a capital gain (8.33% divided by 25%). 

Should I try to sell assets before June 25th to avoid an increase on capital gains tax?

I guess the answer is it depends, Alan. If you are expecting to sell an asset within the coming years anyway, there may be an advantage to selling prior to June 25 and paying tax today. 

As an example, say you have a corporation that is paying 50% marginal tax. If you sell something before June 25, you will pay 25%. So, if you have a $10,000 capital gain, you will pay $2,500 of tax. 

If you sell something after June 25, you will pay 33.33% tax (50% of 66.67%). So, your $10,000 capital gain will have $3,333 of tax. For individuals, this higher inclusion rate and tax rate will only apply to capital gains of more than $250,000 in a single year.

If you are going to sell next year, it is worth paying $833 of tax a year earlier? Think of it like debt. Imagine you can buy a refrigerator and you can pay $2,500 today or you can pay $3,333 in a year. Paying in a year costs you 33.33% more. That is a pretty high financing charge. 

What about paying that $3,333 in five years? That would be like paying 5.9% interest. Not bad, right? But, because you are paying the so-called “interest” with after-tax dollars, I would say you want a lower interest rate than 5.9% to make it worth it. In other words, if your investments are only earning 5% to 6% per year pre-tax (less after tax), it may not be worth it to effectively pay 5.9% more annually. 

For most investors earning a reasonable, mid-single-digit return, you might need to hold an asset for closer to 10 years to end up coming out ahead. 

I am not suggesting you sell everything you expect to sell in the next 10 years before June 25. The budget proposals could be changed before enacted. A new government could change the rules again. You may have personal circumstances that make things different for you. 

The point here is that if someone is very likely to sell an asset in the next few years that will be subject to the higher inclusion rate, there may be an advantage to doing so before June 25. And, that would generally apply to corporations. For individuals, only assets that would lead to more than $250,000 of tax in a single year.

Can you split capital gains between spouses in Canada?

When you die, you have a deemed disposition of assets. That would include a cottage. Although a cottage can qualify for the principal residence exemption, I will assume, Ian, you have a home where you live for which you would instead claim this exemption. 

You can leave a cottage to your spouse and have it pass to them at its adjusted cost base without triggering tax. But you have the option of having the transfer value at any price between the cost base and the fair market value. If anyone other than your spouse inherits, there is capital gains tax payable. 

This creates an interesting situation with these new changes. If a taxpayer dies and leaves a cottage to their spouse with a capital gain of more than $250,000, there may be situations where you want to declare a partial capital gain on the first death. If the surviving spouse is older, this may be more worth considering. If they are younger, it can be a tougher decision to make to prepay tax that could otherwise be paid many years in the future. 

So, Ian, if you both disposed of the property at the same time, like by selling it, you can probably both have up to $250,000 of capital gains subject to the lower inclusion rate. I say “probably” because it depends on who beneficially owns the cottage.

If one of you inherited the property, or if you were a one-income family where only one of you paid for the cottage effectively, it may be that the capital gain only applies to one of you. This is not a new thing, as income attribution has long applied for couples. Just because a couple legally owns a cottage or an investment account or another asset jointly, it does not mean that each owns half beneficially for income-tax purposes.

So, when selling, in many cases, the result of a large capital gain can be allocated between the spouses. And both can have a $250,000 limit for the lower inclusion rate. On death, it becomes trickier. There may now be an advantage to paying some tax on the first death, whereas planning to this point has generally been to defer tax and have taxation occur on the second death.

Capital gains tax in Canada

Capital gains tax changes have been speculated upon for many years. The capital gains inclusion rate was higher than the newly proposed limit in the past—75% in the 1990s. Although the government’s positioning has been that only the wealthiest 1% will be paying more tax, it appears many more taxpayers will be impacted. That includes publicly traded companies that investors own in their registered retirement savings plans (RRSPs), pensions, and even the Canada Pension Plan (CPP). 

What level of tax is “fair” is difficult to ascertain. But when higher tax impacts you, it may feel unfair. 

Navigating the new capital gains rules will help you stay onside and keep more of your income after tax.

More about capital gains tax in Canada:

• What is a non-registered account and how does it work?
• Can you save on taxes by owning an investment account with your child?
• How to carry back a capital loss for a tax refund
• The tax implications for Canadians selling foreign real estate

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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