2024 Change to Capital Gains Tax Could Significantly Impact Real Estate Investors

In the 2024 federal budget release, the government of Canada announced a change to capital gains tax

This is the first change to capital gains rules in 23 years. If the legislation passes, the changes will go into effect on June 25, 2024—so we could see an uptick in real estate sales before the end of June.

What is the Change to Capital Gains?

For individuals who own real estate in their personal name and realize more than $250,000 in capital gains in a year, there will be increase in taxes from one-half to two-thirds of the capital gain. The first $250,000 will still be taxed at one-half, while anything over $250,000 will be taxed under the new rules.

For corporations and trusts, there will be no threshold. The tax rate will increase to two-thirds for all realized capital gains starting at dollar one.

*It’s important to note that capital gains on the sale of principal residences remain untaxed if the property has been owned for more than a year.

How this Changes Capital Gains Paid on Real Estate Owned in Personal Names:

A couple makes a combined salary of $150,000 a year and sells their vacation home, netting $300,000 in capital gains.

Under the current tax rules, they would pay 50% on the capital gain amounting to $150,000.

Under the proposed rule changes, they would pay 50% on the first $250,000 amounting to $125,000 and two-thirds on the remaining $50,000 which would amount to approximately $33,333 for a total of $158,333.

This difference in this situation is over 8k.

How this Changes Capital Gains Paid on Real Estate Owned by a Holding Company:

A real estate investor sells a property owned under a holding company, netting $200,000 in capital gains.

Under the current tax rules, they would pay 50% on the capital gain amounting to $100,000.

Under the proposed rule changes, they would pay two-thirds on the entire $200,000 which would amount to approximately $ for a total of $133,333.

The difference in this situation is over 30k!

Who Will the Capital Gains Changes Impact?

The Department of Finance has said that this change will impact very few Canadians and for 99.87%, personal income taxes on capital gains will not increase.

But it is also likely to come into play for individuals selling vacation homes that have greatly appreciated and real estate investors. These individuals are not necessarily part of the ultra rich.

What Should Investors Be Thinking About?

This change will have a significant impact on investors who have opted to purchase real estate under a holding company. Up until now, this has been a preference for many. Now, the big debate will become…

Do you pull money out of your holding company and buy the properties personally—this would incur tax on the funds that you have to pull out for down payment…

OR

Do you leave the funds in your holding company, thereby sheltering yourself from a tax event when you buy the real estate, but expose yourself to higher capital gains tax when you sell the properties?

This decision will be individual to each investor, but it adds a level of complexity to the already difficult choice of whether or not to purchase real estate investments under your personal name or a holding company. It’s a good idea for investors to have a conversation with their accountant and/or mortgage broker about how best to approach their real estate transactions moving forward.

Want to chat about your options? Reach out to our team!