The 2024 amendments to Canada’s Income Tax Act have been announced and will come into effect after June 25th, 2024. Though it’s important to note that these laws are not in effect yet.
This article explains capital gains tax in Canada, what the June 2024 changes mean for Canadians, and how changes to the capital gains tax may affect inheritance in Canada.
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What is capital gains tax in Canada?
Capital gains tax is the tax you pay when the value of certain assets like stocks, real estate, business assets, and valuable metals, increases beyond what you paid to purchase the asset.
It’s not a separate tax on its own. Instead, the profit you make gets added to your total income and taxed along with your regular income tax.
Currently, when you have capital gains, only half of that profit is counted as part of your income for tax purposes. This is called the capital gains inclusion rate, and it also applies to losses.
What’s changed about capital gains tax in 2024?
The Canadian Budget 2024, effective June 25, 2024, is increasing the tax rate on any gains from half to two-thirds for corporations and trusts. For individuals, the rate is increasing on profits exceeding $250,000 made after June 25, 2024.
This means that for individuals, the first $250,000 of capital gains in a year will have 50% included as taxable income, while any gains above $250,000 will have 66.67% included as taxable income. For corporations and trusts, 66.67% of all capital gains will be taxable income.
The $250,000 threshold applies to individuals after considering various factors like current-year losses, losses from previous years used to reduce current gains, and exemptions claimed for certain gains.
Losses from previous years can still offset gains, meaning a loss from before the rate change can still cancel out a gain afterward.
Note: The $250,000 threshold for individuals applies fully in 2024 only to gains made after the change.
📺 Watch video of Prime Minister Justin Trudeau explaining the capital gains tax changes →
Types of assets subject to capital gains tax
The following types of assets are subject to capital gains tax in Canada after the Budget 2024 changes:
- Stocks, bonds, mutual funds, and other investment securities
- Real estate properties, including rental properties, cottages, and land (excluding principal residences)
- Precious metals like gold and silver
- Business assets such as equipment, inventory, and intellectual property
Capital gains on inheritance
Assets such as stocks, real estate, valuable metals, and business assets are subject to capital gains taxes. If you inherit any of these assets, there is no tax at the time of inheritance because Canada has no inheritance tax.
That being said, when someone passes away, any assets they owned will be considered to be “sold” on their date of death, and the estate would be required to pay capital gains on those assets.
For example, if you own a secondary residence like a cottage, and you purchased it for $750,000 in 2020, and you pass away in July 2024 when the cottage is worth $1.1M, your estate will be required to pay capital gains tax on the $350,000 gain.
Is there capital gains tax on inherited property in Canada?
Because of the principal residence exemption, if you inherit real estate and it is a primary place of residence, you will not owe capital gains tax if you sell it later on. But if you inherit property and sell it for a profit without it being your primary residence, then the rules of capital gains tax apply.
How to avoid capital gains tax on property in Canada
If it’s a primary residence, there is an exemption from capital gains tax. But if the inherited property is not a primary residence, it will be subject to capital gains tax when the owner passes away.
Those taxes are taken care of by the estate itself, not the beneficiary who receives the property as an inheritance.
Additionally, capital gains still apply if you are a co-owner of the residence and the other owners pass away. The difference is that you would only pay capital gains tax on the portion you inherited from your parents, not on your existing ownership stake.
How to avoid/reduce capital gains tax
Joint ownership of assets
For example, by changing ownership of your solely-owned secondary home to jointly owned with rights of survivorship with your spouse or loved one, they become the sole owner when you pass away. This means the asset isn’t “sold” to your estate after you pass, so your estate does not have to pay capital gains taxes.
The asset is then only subject to capital gains if the surviving owner sells it or if it goes into their estate when they pass away.
Use tax-advantaged accounts like TFSAs and RRSPs
Investments held in a Tax-Free Savings Account (TFSA) are completely sheltered from capital gains tax, so any capital gains realized within your TFSA are tax-free.
Capital gains in a Registered Retirement Savings Plan (RRSP) are tax-deferred until withdrawal, at which point they are taxed as regular income. So until you take the money out of your RRSP, it remains tax-free.
Claim capital losses to offset gains
Another technique you can use to reduce or avoid capital gains tax is by reducing your gains through active losses. This is called tax-loss harvesting and involves first selling losing investments, then buying a similar (but not the same) investment. This allows you to experience a reportable loss that offsets other capital gains.
Losses can also be deferred back a maximum of three years prior to the current year or, if you have net capital losses that cannot be fully offset by capital gains in the current year, you can carry the unused portion forward indefinitely to future years.
Defer selling appreciated assets until a lower income year
In Canada, you don’t have to pay capital gains tax on an investment that has increased in value (an unrealized capital gain) until you actually sell or dispose of that asset. If you’re having a good income year and are concerned about paying high capital gains tax, you may want to consider waiting a year before selling assets that are subject to capital gains tax.
Donate appreciated assets to charity
When you donate to a registered charity, you receive a tax receipt that lets you deduct part of your donation from your income tax. To reduce or avoid capital gains tax, you can also donate stocks directly to charity. In this situation, you’re transferring stocks, not selling them. Because of this, there is no capital gain and no tax added to your income.
💙 Learn more about leaving gifts to charity →
When is capital gains tax paid?
Capital gains tax is payable in the year that your asset is sold or disposed of, not when the gain is realized.
The tax is reported and paid when filing your annual income tax return for that year.
Plan for the future with an estate plan
It’s important to keep an ear open for new legislative changes that may affect your future plans. No one knows when legislation surrounding the inheritance or even probate processes will change, so remember to always keep your estate plans, insurance policies, and investment profiles up to date with named beneficiaries to protect the inheritances of your loved ones.
If you make a legal will with Willful, you’ll have free unlimited updates for life and peace of mind knowing your wishes are documented and your estate is secure.
