Big changes have arrived in the world of capital gains tax., these updates, announced in Budget 2024, are stirring quite a conversation, especially among us in the real estate sector. Here’s what you need to know about these changes and how they might affect your investments.
What’s New?
The capital gains inclusion rate – that’s the part of your gains that gets taxed – has jumped from 50% to 67%. This increase hits individuals with over $250,000 in annual capital gains and all corporate capital gains. The federal government says this move is about tax fairness and boosting revenue by $19.4 billion over five years.
What This Means for Real Estate Investors?
Secondary Properties and Family Cottages
If you’re selling a secondary property or a cherished family cottage, be prepared for a bigger tax bill. With a larger portion of your profit now taxable, the return on these sales will take a hit.
Small Business Owners and Farmers
Small business owners and farmers, listen up! The Canadian Federation of Independent Business (CFIB) reports that half of all small-business owners will feel the sting of these changes. Farmers, in particular, face new hurdles when transferring family farms, which might lead to more outright sales rather than keeping them in the family.
Corporations
For those of you running your real estate investments through a corporation, the news isn’t great. Two-thirds of all corporate capital gains are now taxable, impacting your overall profit margin. This is a significant shift for professionals like doctors who operate their practices as corporations.
How to Mitigate the Impact?
Lifetime Capital Gains Exemption (LCGE)
There’s some good news: the Lifetime Capital Gains Exemption has been bumped up to $1.25 million. This is a helpful tool to offset some of the increased tax burden, especially for small business shares, farms, and fishing properties. But, as some experts have pointed out, this might not be enough for everyone.
Canadian Entrepreneurs’ Incentive
The new Canadian Entrepreneurs’ Incentive reduces the inclusion rate to 33% on a lifetime maximum of $2 million in eligible capital gains. This starts at $200,000 in 2025 and gradually increases to $2 million by 2034. If you’re planning significant investments, this could be a valuable benefit.
Strategic Moves for Real Estate Investors
Tax-Sheltered Accounts
Consider utilizing Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) to manage your gains. These accounts allow gains to be realized tax-free, offering a tax-efficient way to grow your investments.
Tax Loss Harvesting
Another strategy is tax loss harvesting, where you sell underperforming assets to generate capital losses and offset your gains. This can help reduce your overall tax bill but requires careful planning to avoid penalties.
Professional Advice
These new rules are complex, so I highly recommend consulting with a tax professional. They can help you develop strategies tailored to your unique situation, ensuring you minimize the impact of the new inclusion rate and maximize your benefits.
Final Thoughts
These changes to the capital gains tax inclusion rate are a big deal, especially for us in real estate. While they aim to improve tax fairness and raise significant federal revenue, they also bring new challenges. Understanding these changes and planning strategically can help you navigate this new landscape effectively. If you have questions or need advice on how these changes might affect your investments, don’t hesitate to reach out. Lina & Team is here to help you make informed decisions and optimize your returns in this evolving market. Let’s tackle these changes together and continue to thrive in the real estate world!
