Changes to Capital Gains Taxation Announced in Budget 2024
Federal Government Proposes Increase in Inclusion Rate
The federal government has proposed an increase in the inclusion rate from 50% to 66.67% on capital gains, effective January 1, 2024. This change is intended to ensure that capital gains are taxed at a similar rate to other forms of income, such as employment income.
Impact on Capital Gains Taxation
The proposed increase in the inclusion rate will significantly impact capital gains taxation in Canada. Currently, only 50% of capital gains are included in taxable income. This means that a taxpayer who sells an asset for $100,000 and has an adjusted cost base of $50,000 will pay tax on only $25,000 of the gain. Under the proposed changes, the inclusion rate would increase to 66.67%. This means that the same taxpayer would pay tax on $33,333 of the gain, resulting in a higher tax liability.
One-Half and Two-Thirds Inclusion Rates
The proposed changes introduce a one-half inclusion rate for the first $250,000 of capital gains and a two-thirds inclusion rate for gains above this threshold. This means that taxpayers with capital gains below $250,000 will pay tax on only 50% of the gain, while taxpayers with gains above $250,000 will pay tax on 66.67% of the gain.
Effective Marginal Tax Rates
The proposed changes will also increase the effective marginal tax rates for stock option benefits and capital gains. For example, the top effective marginal tax rate for stock option benefits and capital gains that are taxed as business income will increase from 38.9% to 53.3%, while the top effective marginal tax rate for capital gains that are taxed as personal income will increase from 33.3% to 43.3%.
Conclusion
The proposed changes to capital gains taxation in Budget 2024 are a significant development that will have a substantial impact on taxpayers across Canada. The proposed increase in the inclusion rate and the introduction of the one-half and two-thirds inclusion rates will result in higher tax liability for many taxpayers, particularly those with higher capital gains. It is important for taxpayers to be aware of these proposed changes and to consider their potential impact on their financial planning.
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