A lot has changed over the past year, including the proposed capital gains tax changes in Canada, which took effect on June 25, 2024 and saw the capital gains inclusion rate increase from one-half to two-thirds for capital gains in excess of $250,000 per year for individuals, and on all capital gains for corporations and most types of trusts. This is important to note if you sold capital property any time in 2024 and have capital gains or losses to report on your 2024 income tax return.
You will be required to separately report capital gains and losses realized before June 25, 2024 (Period 1) from those realized on or after June 25, 2024 (Period 2) as two different inclusion rates will apply to your capital dispositions in the 2024 transition year.
Capital property can include tangible property such as real estate, vehicles, stocks, bonds, cryptocurrencies, collectibles, and art, as well as intangible property such as patents and trademarks. Generally, if you sell this type of property for more than what you originally paid, you have a capital gain; likewise, if you sell for less than the original cost, you have a capital loss.
Whatever the outcome, you are required to report all capital property sales in your income tax return. In Canada, capital gains have a tax advantage over other types of income as you’re only taxed on one-half of a capital gain for dispositions that occurred in Period 1. This advantage has now decreased with the increased two-third inclusion rate for dispositions that occurred in Period 2. Capital losses can be used to offset capital gains so that you’re taxed less. How can you best use capital gains and losses to reduce your taxes owed? The first step is determining if you have capital property.
What qualifies as capital property?
Capital property is generally used to generate long-term income, such as real estate that earns rental income, investments, and equipment used to run a business. If you have a laptop that you’re using to run your business, the laptop will be considered capital property. But if you’re planning on selling laptops as part of your regular business activity, the laptops will be classified as income-producing property, not capital property.
What about personal property? Certain capital property is considered personal-use property such as cars and boats, if you own them primarily for personal use. In most cases, you do not end up with capital gains as these types of assets usually decrease in value.
But in the case of real estate transactions, you must report the sale on your income tax return whether the sale resulted in a gain or a loss. If there is a gain, you may not be taxed on this gain if the home was your principal residence. Failing to report the sale of your principal residence could result in the entire gain being taxable and could be subject to some significant penalties.
Alternatively, if you sold your summer vacation house, a capital gain on that home could be taxable. What if you flipped a home? If you purchased it with the sole intention of renovating it to sell, it is not considered capital property, much like if you sell laptops as part of your regular business activity.
What’s the capital gains tax advantage?
Let’s say you originally bought shares in a company for $4,000. This is known as the adjusted cost base (ACB). A couple of years later, you sell your shares for $6,000. You also incur some expenditures in selling your capital property, such as a $50 commission fee to sell your shares. You are allowed to deduct this fee from the proceeds when calculating your gain.
As a result, your total capital gain will be your selling price ($6,000) minus your ACB ($4,000) minus your selling costs ($50), which totals $1,950. If you sold the shares before June 25, 2024 (Period 1), you are only taxed on 50% of the capital gain, which would be equal to $975 in this scenario. If you sold shares on or after June 25, 2024 (Period 2) you may be taxed on 66.67% of the capital gain, which would be equal to $1,300 in this scenario based on the new rules.
How do capital losses benefit me?
Unlike capital gains, capital losses don’t directly affect your income. For example, if you sold capital property for less than your ACB, your regular income won’t be reduced. However, if you also had a capital gain that same year, you can use your capital loss to offset your capital gain, thus reducing the amount of income tax you need to pay.
The hard rule is that if you experience a capital loss in the same year as you have a capital gain, you must use your capital loss to reduce your capital gain in that same year. For example, if you have a capital gain of $1,950 from selling a stock, but you also have a capital loss of $500 from selling some cryptocurrency during the same year, you can deduct that $500 from your $1,950 gain – meaning your net capital gain will be $1,450.
Gains and losses from the same period would first be netted against each other. A net gain (loss) would arise if gains (losses) from one period exceed losses (gains) from that same period. You would be subject to the higher inclusion rate in respect of your net gain arising in Period 2, to the extent that those net gains are not offset by a net loss incurred in Period 1.
But what if you had a capital loss this year, but no gain? You can choose to carry back your capital loss up to three years prior, offsetting any capital gains incurred during any of these years, which could lead to a tax refund. You can do so by filling out Form T1A (Request for Loss Carryback) on your personal income tax return. Alternatively, you can hang on to your capital loss from this year and use it to offset a capital gain in the future. There is no time limit as to how far forward you can carry a capital loss. Carrying forward your capital loss might be a good strategy if you know that you will be subject to capital gains to the new 66.67% inclusion rate.
Net capital losses of other years are deductible against current-year taxable capital gains by adjusting their value to reflect the inclusion rate of the capital gain being offset. That is, a capital loss realized when a different inclusion rate applied can still fully offset an equivalent capital gain realized in a year during which another inclusion rate applied.
Are there any exemptions to the capital gains tax?
As touched on above, individuals would have access to a reduction when calculating their total income that would effectively decrease the inclusion rate applied to their capital gains under the $250,000 threshold from the two-thirds inclusion rate to one-half. This reduction would be available on capital gains realized by individuals in the 2024 year, including amounts brought into income from a capital gains reserve or allocated by a partnership or trust, and would be determined net of any capital losses for the year. If there is a capital gain on a disposition of a capital property jointly owned by multiple individuals, each individual would have access to their $250,000 threshold.
There are some exemptions for qualified small business corporation shares and qualified farm or fishing property for Canadian residents. This includes taxpayers who became residents partway through the taxation year in question. As the exemptions can be complicated, you might want to consult a chartered professional accountant to determine whether your property qualifies for the lifetime capital gains exemption and to answer any other questions you may have about capital gains and losses. Further, there are some exemptions for the capital gains for dispositions to Employee Ownership Trust and the new Canadian Entrepreneurs’ Incentive.
The bottom line
If you make a profit from selling capital property, you need to report it. Since you’re taxed on 50% of the capital gain realized in Period 1 and 66.67% of the capital gain realized in Period 2 of 2024, paying this reduced tax far outweighs the risks of not reporting your gain. Don’t forget that any capital gains or losses for your 2024 tax return must have been made within the 2024 calendar year, or by December 31, 2024.
Tax rules can be complex. This article is not intended as tax advice, and you should not make tax decisions based solely on the information presented. You should seek the advice of a chartered professional accountant before implementing a tax plan or taking a tax filing position.
Bilal Kathrada, CPA, CA, is a principal at Clearline Chartered Professional Accountants specializing in income tax and succession planning for Canadian owner-managed businesses in various industries. Bilal is a member of the CPABC Taxation Forum and CPABC’s media expert on RRSPs and income tax filings.
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