Understanding the Impact of Budget 2024's Capital Gains Tax Changes in Canada

As announced in Budget 2024, the Canadian government has proposed significant changes to the taxation of capital gains, aimed particularly at addressing disparities in the tax treatment of different forms of income. Here's what you need to know about these changes and how they may affect you.

What's Changing?

Under the proposed amendments, the inclusion rate on capital gains above $250,000 for individuals will increase from the current 50% to two-thirds. This means that a larger portion of capital gains above this threshold will be subject to taxation. Additionally, the changes will apply to all capital gains realized by corporations and trusts, irrespective of the $250,000 threshold.

The proposed modifications are scheduled to take effect on June 25, 2024.

Impact on Individuals and Businesses

While the changes are designed to ensure a fairer distribution of tax burdens, it's essential to understand how they may impact different segments of the population:

1. Wealthy Individuals: Approximately 40,000 of the wealthiest Canadians, with an average income of $1.4 million, are expected to pay more taxes on their capital gains. The increased inclusion rate aims to address the perceived advantage enjoyed by high-income earners under the current system.
2. Small Business Owners and Entrepreneurs: Budget 2024 also introduces provisions to support entrepreneurs, including an expanded lifetime capital gains exemption for small business owners, qualifying farmers, and fishers. Moreover, a new incentive will protect the sell-off of shares in specific circumstances, providing relief for up to $2 million in capital gains per individual over their lifetime.
3. Middle-Income Earners: While the changes primarily target wealthy individuals, the majority of Canadians – around 28.5 million – are not expected to have any capital gains income. Additionally, three million others are projected to have gains below the $250,000 threshold and will not be directly affected by the alterations.