If you’re curious about the buzz surrounding the proposed changes to capital gains taxes in the 2024 Federal Budget, here’s a breakdown:

Capital gains refer to the profits earned from selling assets such as stocks or second homes.

Notably, the 2024 budget maintains the exemption for capital gains from selling a principal residence. However, effective June 25th, the inclusion rate of the capital gains tax is set to increase from 50% to 67%, impacting individuals on profits exceeding $250,000.  

In real estate, capital gains tax comes into play when an individual sells an investment property, vacation home, or any non-primary residence at a profit.

While the aim of this legislative change is to create a “fairer tax system” by ensuring wealthier individuals contribute more to taxation, concerns have been raised about the potential negative impacts this change will have on economic growth, productivity, and housing supply.  

Specifically, the rental market supply may be negatively impacted over the medium to long term as people become less inclined to invest in second properties as the risk/reward profile becomes less attractive for investors.

This change could also affect Canadians nearing retirement who seek reinvestments by selling rental properties or vacation homes to reinvest elsewhere.  

Additionally, taxpayers who receive gifted or inherited properties may face higher capital gains tax rates, depending on various factors.

For example, if you made a $500,000 capital gain on the sale of a cottage you would pay $133,825 in taxes under the previous inclusion rate and $156,129 under the new rate – an increase of $22,304 on a one-time transaction. 

Already, cottage markets are experiencing an increase in listings as some recreational property owners aim to sell before the changes take effect. In the short term, this increase in supply could put increased pressure on pricing for second homes.

While many Canadians may not feel the direct impact of these alterations, it’s prudent to consult with a tax specialist if you own a second property, rely on real estate investments for retirement income, or if you are currently a landlord.  We suggest that you carefully consider the pros and cons associated with the disposition of any real estate due to this change in taxation. It is not out of the question that the inclusion rate change could be reversed in the future especially if we have a change in government.

If you have any questions about how this change may impact your real estate plans, don’t hesitate to reach out!