What You Need to Know About the New Capital Gains Tax Changes
In June 2024, the Federal Government passed legislation that increases the capital gains tax from 50% to 66.7% for Canadians who have annual capital gains greater than $250,000. For tax filers generating gains of $250,000 or less, they will continue to pay tax on 50% of their capital gains.
For corporations and trusts, there is no threshold. All capital gains are taxed at 66.7%. The Federal government says the hike in capital gains taxes will generate an additional $19 billion in revenue over the next five years.
What Are Capital Gains?
Capital gains are the profit that individuals or businesses make when they sell an asset, such as stocks and bonds, land, an investment property, a cottage, a building, or equipment used for a business.
Generating capital gains is a good thing. It means the initial investment has grown in value and you earned a profit after the sale. At the same time, the CRA wants their share of those profits.
What does the new capital gains tax increase look like? If you sold shares and ended up with a profit of $10,000, 67% of the total capital gain is taxable. Specifically, it is included in your annual taxable income and taxed at your marginal tax rate. The remaining 33.3% or $3,330, is tax-free.
How Many Canadians Does the New Capital Gains Tax Affect?
According to the Federal government, the new increase to the capital gains tax is not only “delivering tax fairness for every generation,” but it will only impact a small number of wealthy Canadians and corporations. Approximately 40,000 individuals, or just 0.13% of taxpayers, will earn more than $250,000 in capital gains in 2025.
But the above statistics may be misleading. Most Canadians don’t sell off assets or large portions of their investment portfolio on an annual basis. Instead, selling a cottage, farmland, small business, or valuable antique often happens, perhaps, once in a lifetime.
By only concentrating on one year of statistics, the capital gains increase overlooks the number of Canadians who receive more than $250,000 in capital gains on a one-time basis.
From 2011 to 2021, an average of 44,664 tax filers reported capital gains greater than $250,000 each year. But it’s not the same people every year reporting those capital gains. Over that 11-year period, 66.3% of people who fell in that greater capital gains tax bracket reported that large gain only once. A further 15.4% reported it twice.
Only 4.2% of Canadian tax filers reported capital gains over $250,000 six or more times. That works out to 1,850 people. It’s not those 1,850 Canadian tax filers that are going to generate $19 billion over the next five years. Instead, the capital gains increase will primarily impact middle-class Canadians. And it’s a big number.
How Will the Capital Gains Tax Affect the Canadian Economy and Investments?
There are a few ways the capital gains tax affects the Canadian economy:
The new capital gains tax increase could be triggered if an individual sells an investment property or cottage as it is not deemed a principal residence. Today, approximately 4.4 million Canadians own an investment property with 26% of all Canadians saying they expect to buy an investment property by 2028. One-third (32%) of Canadian real estate investors own two or more properties.
The increased capital gains tax could hurt Canada’s economic competitiveness. Higher capital gains taxes discourage business investment, entrepreneurship, and innovation by reducing the returns that investors, businesses, and entrepreneurs could otherwise look forward to from starting or expanding a business or investing their money in the Canadian economy. This could result in Canadian businesses, talent, and startups taking their businesses elsewhere.
Increased capital gains taxes could make mergers and acquisitions less attractive. According to one study, previous increases in corporate tax gains reduced mergers and acquisitions in Canada by $1.1 billion a year. This resulted in lower market caps, with annual losses of $300 million.
The new capital gains increase further widens the productivity gap between Canada and the U.S. The latest data from Statistics Canada shows that Canada’s labour production—a hubbgmeasure of the average output per hour worked—fell for the fourth straight quarter. In fact, Canada’s productivity gap with the U.S. is about $20,000 per person per year, putting wages 8% below our U.S. counterparts. This has a direct impact on businesses, investments, and capital, especially investing portfolios.
Sharp Asset Management – Helping You Reach Your Financial Goals
If you live in Toronto, Mississauga, or anywhere in the GTA and want to know how the new increase to the capital gains tax affects you, speak with the certified wealth management and retirement planning professionals at Sharp Asset Management.
Sharp Asset Management is an asset management firm that is 100% owner-operated. Our retirement planning professionals are not affiliated with any financial institution, securities firm, or mutual fund company, and our investment decisions are unbiased. We also do not earn any commissions or fees on investments we choose on behalf of our clients.
To learn more about how Sharp Asset Management can help you with your retirement planning, contact us today.
