The 2024 Federal Budget’s proposed capital gains inclusion rate increase has created much discussion and concern for Canadians who own capital property with inherent capital gains. The proposals provide a shortened period of time for proactive planning to manage exposure to the inclusion rate increase.
May 7, 2024
Capital gains basics
A capital gain results when you dispose of capital property for sale proceeds, net of selling costs, greater than the property’s adjusted cost base. Capital property may consist of real property, marketable securities, shares of private corporations, farming and fishing property, and other assets. You should consult with your tax advisor to determine whether the property you are disposing of is capital property.
Currently, 50% of a capital gain is included in calculating your income. This percentage is referred to as the capital gains inclusion rate. The result is known as a taxable capital gain. The 50% inclusion rate also applies to capital losses. The result is known as an allowable capital loss. Any resulting tax liability is calculated based on the net capital gain, which is the taxable capital gains minus allowable capital losses, included in your income tax return multiplied by your marginal income tax rate.
Capital gains inclusion rate history
Capital gains taxation was introduced in 1972. Before 1972, capital gains were not taxable. The capital gains inclusion rate has changed four times since it was introduced in 1972, as follows:
| Time period |
Capital gains inclusion rate |
| 1972 to 1987 |
1/2 (50%) |
| 1988 to 1989 |
2/3 (66.67%) |
| 1990 to February 27, 2000 |
3/4 (75%) |
| February 28, 2000, to October 17, 2000 |
2/3 (66.67%) |
| After October 17, 2000 |
1/2 (50%) |
The capital gains inclusion rate is proposed to change for the fifth time on June 25, 2024.
Capital gains inclusion rate increase proposed in the 2024 Federal Budget
The 2024 Federal Budget proposes to increase the capital gains inclusion rate for capital gains realized on and after June 25, 2024, from 50% to 66.67% for corporations and trusts and from 50% to 66.67% on the portion of capital gains realized in the year that exceed $250,000 for individuals.
The $250,000 threshold would effectively apply to capital gains realized by an individual, either directly or indirectly via a partnership or trust, net of any:
- current year capital losses;
- capital losses of other years applied to reduce current-year capital gains; and
- capital gains in respect of which the Lifetime Capital Gains Exemption (LCGE), the proposed Employee Ownership Trust Exemption, or the proposed Canadian Entrepreneurs’ Incentive is claimed.
For individuals claiming the employee stock option deduction, they would be entitled to a 50% deduction of the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains; however, they would be provided with a 33.33% deduction of the taxable benefit above the combined limit to reflect the new capital gains inclusion rate.
Net capital losses of prior years would continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the offset capital gains. This means a capital loss realized before the rate change would fully offset an equivalent capital gain realized after the change.
Transitional rules will be in place for tax years that begin before and end on or after June 25, 2024. Two different inclusion rates will apply based on when the capital gains and losses are realized. Capital gains and losses realized before June 25, 2024, would be subject to the 50% inclusion rate. For capital gains and losses realized on or after June 25, 2024, the higher inclusion rate would apply to all capital gains for corporations and trusts and those exceeding the $250,000 threshold for individuals.
The annual $250,000 threshold for individuals is proposed to be fully available in 2024 and would not be prorated. It would apply only in respect of net capital gains realized on or after June 25.
Other consequential amendments would also be made to reflect the new inclusion rate. The 2024 Federal Budget notes that additional design details will be released in the coming months.
Taxpayers who may be affected
Generally, the proposed capital gains inclusion rate increase targets high-income individuals who realize significant capital gains each year, such as in their non-registered investment portfolios. However, the proposed capital gains inclusion rate increase may also affect individuals who may be disposing of personal use real property (other than their principal residence, such as their cottage), rental properties, shares of private corporations, and farming and fishing property, among other examples.
Individuals disposing of Qualifying Small Business Corporation shares or Qualifying Farming or Fishing Property may be able to take advantage of the enhanced LCGE proposed in the 2024 Federal Budget. However, any realized capital gain above the LCGE will be subject to the 66.67% inclusion rate once above the $250,000 threshold on and after June 25, 2024.
Perhaps most notable for individuals is the proposed increase in the capital gains inclusion rate that will apply, above the $250,000 threshold, to the deemed disposition of capital property that occurs on death. Generally, individuals are deemed to have disposed of all their capital property for fair market value in the year of death and to have realized any inherent capital gains or losses in the property at that time. Any net capital gains are included in the individual’s final income tax return at the applicable capital gains inclusion rate and then subject to taxation at their marginal income tax rate. So, for individuals with significant inherent capital gains in their non-registered investment portfolios, cottages, rental properties, and other capital property noted above, their resulting tax liability on death may increase on and after June 25th, 2024. Therefore, you should consult with your wealth, tax, and legal advisors to review your estate planning to ensure your planning still accomplishes your goals or whether changes may need to be made, such as reviewing, analyzing, and adjusting your current life insurance coverage.
The chart below illustrates each province’s top personal marginal income tax rate for capital gains, if incurred before June 25, 2024, compared to on and after June 25, 2024. Unless otherwise specified, the top marginal income tax bracket applies to taxable income greater than $246,752 (Federal).
2024 top personal marginal income tax rates for capital gains incurred before June 25, 2024, as compared to on and after June 25, 2024
| Province or territory |
Top marginal income tax rate |
Top marginal income tax rate on capital gains before June 25, 2024 |
Top marginal income tax rate on capital gains on and after June 25, 2024 (greater than $250,000) |
Effective increase in top marginal income tax rate on capital gains (greater than $250,000) |
| Alberta¹ |
48.00% |
24.00% |
32.00% |
8.00% |
| British Columbia1 |
53.50% |
26.75% |
35.67% |
8.92% |
| Manitoba |
50.40% |
25.20% |
33.60% |
8.40% |
| New Brunswick |
52.50% |
26.25% |
35.00% |
8.75% |
| Newfoundland & Labrador¹ |
54.80% |
27.40% |
36.54% |
9.14% |
| Nova Scotia |
54.00% |
27.00% |
36.00% |
9.00% |
| Northwest Territories |
47.05% |
23.53% |
31.37% |
7.84% |
| Nunavut |
44.50% |
22.25% |
29.67% |
7.42% |
| Ontario |
53.53% |
26.77% |
35.69% |
8.92% |
| Prince Edward Island |
51.75% |
25.88% |
34.50% |
8.63% |
| Quebec |
53.31% |
26.66% |
35.54% |
8.89% |
| Saskatchewan |
47.50% |
23.75% |
31.67% |
7.92% |
| Yukon¹ |
48.00% |
24.00% |
32.00% |
8.00% |
1 The provincial top marginal income tax bracket differs from the Federal top marginal income tax bracket. It applies to income over $335,845 in Alberta, $252,752 in British Columbia, $1,103,478 in Newfoundland & Labrador, and $500,000 in Yukon.
As illustrated in the chart, if you are subject to taxation in the top marginal income tax bracket, the effective increase in the capital gains tax rate ranges from 7.42% to 9.14%, depending on your province of residence.
Tax planning considerations for those who may be affected
Possibly the most significant planning consideration and opportunity you may have regarding the proposed capital gains inclusion rate increase is to realize inherent capital gains before June 25, 2024, especially if those inherent capital gains are in assets inside a corporation, where the 50% capital gains inclusion rate will not be available on and after June 25, 2024.
This may be less of a concern for trusts because they can generally distribute capital gains they realize to their beneficiaries and receive a deduction from their taxable income. The beneficiaries are then subject to income tax on the distributed capital gains. If the beneficiaries are individuals, these capital gains will be subject to the $250,000 threshold and respective capital gains inclusion rate.
There is no limit on the amount of capital gains subject to the 50% capital gains inclusion rate individuals, corporations, and trusts may realize before June 25, 2024. On and after June 25, 2024, individuals may wish to consider realizing annual capital gains up to the $250,000 threshold to take advantage of the 50% capital gains inclusion rate and to manage their annual taxable income and resulting income tax liability.
Therefore, you may wish to consider realizing capital gains in your non-registered investment portfolios before June 25, 2024, or annually thereafter up to the personal $250,000 threshold, and paying the resulting income tax liability, namely in the following example scenarios:
- you have liquidity needs in the near term, such as in the remainder of 2024 or coming years, where you would otherwise be selling assets in your non-registered portfolios for personal cash flow needs;
- you are planning a significant purchase or expense, such as the purchase of real estate, a vehicle, or a family vacation, in the near term or coming years and would otherwise be selling assets in your non-registered portfolios in order to help fund the purchase or expense;
- you and your wealth advisor typically realize capital gains annually in the regular management of your non-registered investment portfolios, specifically greater than $250,000 in your personal portfolio, and you would otherwise be buying and selling assets and realizing capital gains in the coming years regardless;
- you have health concerns or a shortened life expectancy and have significant inherent capital gains in your capital property that may be realized upon your death in the coming years.
Notably, given the draft Alternative Minimum Tax (AMT) legislation proposed to be effective January 1, 2024, you should consult with your tax advisor to discuss, review, and analyze your susceptibility to AMT on capital gains realized personally before June 25, 2024. AMT only applies to individuals and certain trusts, not to corporations.
If you own real property, such as a cottage, the ability to realize a capital gain before June 25, 2024, is not as simple as disposing of marketable securities in your non-registered portfolio. Planning for significant inherent capital gains in real property should be discussed with your tax and legal advisors. For example, if you are planning on transitioning your cottage to the next generation of family members, you could discuss with your advisors whether you could sell or gift a portion of your cottage on an annual basis to the next generation, realizing a portion of the inherent capital gain annually to manage your $250,000 threshold on and after June 25, 2024. Notably, this strategy is complex and will involve annual tax and legal advisory costs, as well as the potential of land transfer taxes, which should be reviewed, analyzed, and compared to the additional tax cost of any inherent capital gain to be realized and subject to the 66.67% inclusion rate in the future. Importantly, co-owning capital property with other individuals, especially family members, has its own considerations and implications and should be considered and discussed with your tax and legal advisors.
Of course, selling assets, realizing capital gains, and accelerating the payment of income tax earlier than you may have done so needs to be compared to staying invested or not selling the asset and ultimately paying the income tax in the future. You should consult with your wealth and tax advisors regarding your personal circumstances to review, discuss, and analyze any inherent capital gains in your capital property and before implementing any tax planning strategies.
An illustrative tax planning example of realizing a capital gain now versus in the future
If you are an individual, resident in Ontario, and subject to the top marginal income tax rate, then you will effectively pay 8.92% more income tax if you are subject to the 66.67% capital gains inclusion rate on and after June 25, 2024, as compared to if you realized the same capital gain before then.
Say, for example, you realize an inherent capital gain of $100,000 before June 25, 2024, and AMT does not apply; this would result in income tax payable of $26,770 versus $35,690 if the capital gain is subject to the 66.67% inclusion rate on and after June 25, 2024. This amounts to tax savings of $8,920; however, it comes at the cost of accelerating the payment of income tax by realizing the capital gain sooner than you may otherwise have. If you do not have to pay $26,770 of income tax now, those funds could remain invested until you have sold the asset. This assumes you or your investment advisor is not typically buying and selling assets and realizing annual capital gains in managing your non-registered investment portfolio.
Whether you may be better off triggering the capital gain of $100,000 and paying the income tax liability at a lower capital gains tax rate before June 25, 2024, as compared to remaining invested and realizing the capital gain in the future at a higher capital gains tax rate will depend, in part, on what sort of annual investment income and capital growth you may earn on that immediate tax expense. For example, say you do not trigger a capital gain and earn 5% deferred growth, compounded annually, on the $26,770 income tax expense. It would take approximately nine years of deferred growth taxed at the proposed 66.67% inclusion rate to be better off than realizing the capital gain and paying tax at the 50% inclusion rate. Understandably, this time period will depend on your rate of return, the composition of investment income, such as interest, dividends, and deferred growth, and your personal marginal income tax rate.
Generally, the higher the expected rate of return on your capital property, the less time it may take you to be better off than accelerating the realization of the inherent capital gain and paying income tax at the 50% capital gains inclusion rate. In other words, the higher the expected rate of return, the greater the opportunity cost of lost future investment growth by accelerating the realization of capital gains and paying the resulting income tax liability.
In conclusion
The decision to realize or not realize inherent capital gains in your capital property before June 25, 2024, involves many factors. Your liquidity needs, investment management style, expected rates of return, capital property disposition date plans, taxable income, personal marginal income tax rate, and personal health are some of the important factors that you and your tax and legal advisors will need to consider when reviewing your personal circumstances and planning for the proposed capital gains inclusion rate increase.
You may wish to review our article: Four ways to grow your wealth tax-free in Canada.
The 2024 Federal Budget capital gains inclusion rate increase is a proposal at this time and may not be enacted into law as described or at all. Everyone’s situation is unique, and not all general tax planning opportunities may benefit every person. Speak with your own tax advisor for further discussion and analysis and before implementing any tax planning strategies.
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