The Federal Government’s recent budget has made waves with its spending, the size of its deficits over the coming years, and its tax changes. Increases to the Capital Gains Tax (CGT) were particularly contentious:
Any capital gain realized on or after June 25th, 2024, that exceeds $250,000 will see 66% of the gain taxed, up from the present 50%.
This increased ‘inclusion rate’ of 66% applies for individuals, trusts, and corporations.
Keep in mind that the $250,000 threshold only applies to individuals, not corporations or trusts! See pg. 336 of the Budget for this important point.
The capital gains tax exemption on the sale of a primary home remains unchanged.
But for investment properties, pre-construction real estate, cottages, and commercial real estate, the CGT on a sale will be going up.
The government argues that 99.8% of Canadians will not be affected by these changes, and that only 40,000 taxpayers generally achieve capital gains of over $250,000 in “any given year.”
So, what are some scenarios for Tembo customers and readers to consider? What if you’re inheriting a property from your parents?
Inheritance:
If your parents only own one home that they will leave to you, it will be exempt from the CGT. On inheritance, a property is likely ‘sold’ to you as the beneficiary, so there will be no CGT, but other tax consequences are a possibility. An investment property or vacation home that you inherit will be subject to CGT on the transfer if it has accrued value.
Value increases on inherited properties:
When you inherit a primary residence, the fair market value of the home on receipt is the baseline you’ll be assessed on. If the value of the home is $500,000 on receipt, then the capital gain will be $100,000 if you sell it three years later for $600,000.
Exemptions?
The 2024 budget will raise the lifetime capital gains exemption on the sale of farming and fishing properties to $1.25 million. That figure would be indexed to inflation thereafter.
So why sell now?
A key question that many have been raising on X and across media channels. Why should anyone with an investment property or cottage sell after June 25th? Rates are high and price dynamism is weak right now. There’s not much time to prepare for a sale up to June 25th. Why not wait until the next federal election, when a potential Conservative Government will likely reverse these changes? A real estate market already beleaguered by higher rates will likely be cooled even more by this measure.
Any options?
The key stipulation is that the primary, principal residence is exempt from the CGT. So how does a property qualify as a principal residence? A key factor is that you have to live in the property for at least one year. Here are some of the conditions according to the CRA:
- It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
- You own the property alone or jointly with another person.
- You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
- You designate the property as your principal residence.
The land on which your home is located can be part of your principal residence. Usually, the amount of land that you can consider as part of your principal residence is limited to half of a hectare (1.24 acres).
Tembo strongly advises that our clients, community, and readers consult with us and a tax professional to navigate these changes. We can help you explore options, plan, and come up with the best possible financial solutions. Whether you need a first, second, or third mortgage, debt consolidation services, or other financial help, please call us at 1-844-238-6717!