Changes are coming for the capital gains tax rate—and I want to help ensure your wealth plan accounts for all new tax measures. In the 2024 federal budget, the Canadian government proposed changes to the capital gains tax inclusion rate that will take effect June 25, 2024. A capital gain is the portion of profit from the sale of an asset. As tax planning is an integral part of your finances, these changes may affect several aspects of your wealth plan from real estate holdings and investment strategies to legacy gifting and estate planning. 

In the latest Ask the Experts video, Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC Private Wealth along with real estate investor and media personality Scott McGillivray answer common questions about how the proposed changes may affect your real estate holdings and investment properties, everything from cottages to condos.
 

Transcript

Here are some highlights from the video:

What are the proposed changes to the capital gains tax inclusion rate?

The current capital gains inclusion rate is 50% and the capital gain from the sale of your principal residence is generally exempt from tax. However, the new inclusion rate will affect capital gains from other types of investments such as rental properties, cottages, condos and investment properties as well as securities in non-registered investment accounts. With the proposed changes, the inclusion rate will increase to 66.67% on the portion of capital gains realized that exceed $250,000 for individuals in the year on or after the effective date. Therefore, this year, two different inclusion rates will apply: capital gains realized before June 25, 2024 and those realized on or after that date. 

Factors to consider when being proactive with capitals gains tax

When talking about real estate assets, it’s not necessarily very practical to sell before the (quickly approaching) effective date. However, you have options if you’d like to trigger a capital gain before the changes take effect. You can transfer the property to a trust or family member and a capital gain will be triggered if the sale price is higher than your adjusted cost base (or tax cost). However, with a property transfer, you don’t actually sell the property and receive cash in hand, but you will be responsible for declaring the capital gain and likely owe tax on that portion when you file your personal income taxes next year. 

 

If you don’t want to trigger a capital gain on your real estate holdings and prefer not to pay the taxes upfront on the gains, the best thing to do is nothing. Whether you sell a property or transfer it to someone else, a capital gain will likely be triggered and you’ll be responsible for the tax. 

 

When deciding whether to sell a property, it’s important to consider the opportunity cost and potential missed opportunities. Jamie also outlines several considerations in the report Should I sell or should I hold? Capital gains tax planning. Factors such as the upfront cost of capital gains tax, the rate of return and time horizon should be considered when deciding whether to hold real estate investments or sell and invest the profits in another type of security. 

How does capital gains tax affect decisions when investing in real estate?

Don’t panic. If you’re not interested in selling or transferring your real estate assets, the best thing to do is wait and see. For buy and hold investors who plan to stay invested over the long term, this change is a hurdle—it shouldn’t be a showstopper. There’s no reason to make rushed decisions before the effective date.

The other consideration is capital expenditures. If you’re investing in real estate as a way to generate wealth, it’s important to monitor capital expenditures. The total amount of capital gains that need to be declared isn’t only the difference between the purchase price and the sale price, it also takes into account capital expenses. If you purchase a vacation property and renovate it, the renovation costs are a capital expenditure and can be added to your adjusted cost base and deducted from the proceeds when calculating. We can discuss your options and find the best solution for your personal situation. The key to any tax changes is to be diligent. 
 

At CIBC Private Wealth, we take a comprehensive approach to managing, building and protecting your wealth. If you have questions or would like to discuss tax planning in more detail or have questions about your wealth plan and investment portfolio, please get in touch with me anytime.