On April 16, 2024, the Federal Government of Canada presented its Budget. Among the number of programs proposed was a change to the capital gain inclusion rate and taxation, which may have an impact on Canadian investors.
As per the recent Federal Budget, effective June 25, 2024, the proposed capital gain inclusion rate would increase from 50% to 66.67% on annual capital gain income beyond $250,000.
Let’s break this down further:
What is a capital gain inclusion rate? This is the portion of your realized capital gain that will be included in your taxable income.
What does this change look like? It is proposed that starting June 25, 2024, any capital gains realized within a tax year will be subject to a two-tier taxable income inclusion rate:
- For the first $250,000 of capital gain, 50% of that amount (up to $125,000) will be included in your taxable income.
- For any capital gain amount beyond $250,000, 66.67% of that amount will also be included in your taxable income.
How might this affect you? The proposed change will only affect investors who realize a capital gain exceeding $250,000 in a taxation year.
For a clearer understanding of the impact on taxes payable, tax-free income, and net cash in your pocket, let’s look at some numerical examples:
| Prior to June 25, 2024 | Post June 25, 2024 | ||||
|---|---|---|---|---|---|
| Realized Capital Gain | $ 250,000 | $ 250,000 | |||
| Taxable Income “Inclusion Rate” – No Limit | 50% | $ 125,000 | |||
| Taxable Income “Inclusion Rate” Up to $250k | 50% | $ 125,000 | |||
| Taxable Income “Inclusion Rate” Beyond $250k | 66.67% | $ – | |||
| TAX-FREE INCOME | $ 125,000 | $ 125,000 | |||
| TAXABLE INCOME | $ 125,000 | $ 125,000 | |||
| TAX PAYABLE at HIGHEST MARGINAL TAX RATE | 52% | $ 65,000 | 52% | $ 65,000 | |
| NET CASH IN POCKET | $ 185,000 | $ 185,000 | |||
As per the proposed change effective June 25, 2024, this investor is only subject to the first tier of the new taxable inclusion rate, as their capital gain did not exceed $250,000.
- The investor would include 50% ($125,000) of their capital gain in their taxable income.
- The investor would pay $65,000 at the highest marginal tax rate, with $185,000 remaining net cash in pocket. Their net cash remains the same as prior to June 25, 2024.
| Prior to June 25, 2024 | Post June 25, 2024 | ||||
|---|---|---|---|---|---|
| Realized Capital Gain | $ 350,000 | $ 350,000 | |||
| Taxable Income “Inclusion Rate” – No Limit | 50% | $ 175,000 | |||
| Taxable Income “Inclusion Rate” Up to $250k | 50% | $ 125,000 | |||
| Taxable Income “Inclusion Rate” Beyond $250k | 66.67% | $ 66,670 | |||
| TAX-FREE INCOME | $ 175,000 | $ 158,330 | |||
| TAXABLE INCOME | $ 175,000 | $ 191,670 | |||
| TAX PAYABLE at HIGHEST MARGINAL TAX RATE | 52% | $ 91,000 | 52% | $ 99,668 | |
| NET CASH IN POCKET | $ 259,000 | $ 250,332 | |||
As per the proposed change effective June 25, 2024, this investor would be subject to both tiers of the new taxable inclusion rate, as their capital gain exceeded $250,000.
- For the first $250,000 of their capital gain, 50% ($125,000) would be included in their taxable income.
- For the remaining $100,000 of their capital gain, 66.67% ($66,670) would also be included in their taxable income. So, their total taxable income would be $191,670.
- The investor would pay $99,688 at the highest marginal tax rate, with $250,332 remaining net cash in pocket.
| Prior to June 25, 2024 | Post June 25, 2024 | ||||
|---|---|---|---|---|---|
| Realized Capital Gain | $ 500,000 | $ 500,000 | |||
| Taxable Income “Inclusion Rate” – No Limit | 50% | $ 250,000 | |||
| Taxable Income “Inclusion Rate” Up to $250k | 50% | $ 125,000 | |||
| Taxable Income “Inclusion Rate” Beyond $250k | 66.67% | $ 166,675 | |||
| TAX-FREE INCOME | $ 250,000 | $ 208,325 | |||
| TAXABLE INCOME | $ 250,000 | $ 291,675 | |||
| TAX PAYABLE at HIGHEST MARGINAL TAX RATE | 52% | $ 130,000 | 52% | $ 151,671 | |
| NET CASH IN POCKET | $ 370,000 | $ 348,329 | |||
As per the proposed change effective June 25, 2024, this investor would be subject to both tiers of the new taxable inclusion rate, as their capital gain exceeded $250,000.
- For the first $250,000 of their capital gain, 50% ($125,000) would be included in their taxable income.
- For the remaining $250,000 of their capital gain, 66.67% ($166,675) would also be included in their taxable income. So, their total taxable income would be $291,675.
- The investor would pay $151,671 at the highest marginal tax rate, with $348,329 remaining net cash in pocket.
| Prior to June 25, 2024 | Post June 25, 2024 | ||||
|---|---|---|---|---|---|
| Realized Capital Gain | $ 1,000,000 | $ 1,000,000 | |||
| Taxable Income “Inclusion Rate” – No Limit | 50% | $ 500,000 | |||
| Taxable Income “Inclusion Rate” Up to $250k | 50% | $ 125,000 | |||
| Taxable Income “Inclusion Rate” Beyond $250k | 66.67% | $ 500,025 | |||
| TAX-FREE INCOME | $ 500,000 | $ 374,295 | |||
| TAXABLE INCOME | $ 500,000 | $ 625,025 | |||
| TAX PAYABLE at HIGHEST MARGINAL TAX RATE | 52% | $ 260,000 | 52% | $ 325,013 | |
| NET CASH IN POCKET | $ 740,000 | $ 674,987 | |||
As per the proposed change effective June 25, 2024, this investor would be subject to both tiers of the new taxable inclusion rate, as their capital gain exceeded $250,000.
- For the first $250,000 of their capital gain, 50% ($125,000) would be included in their taxable income.
- For the remaining $750,000 of their capital gain, 66.67% ($500,025) would also be included in their taxable income. So, their total taxable income would be $625,025.
- The investor would pay $325,013 at the highest marginal tax rate, with $674,987 remaining net cash in pocket.
Will this change impact me?
In order to assess if the proposed change could impact you and your Skyline investments, please contact your Advisor at Skyline Wealth Management. You can reach Skyline Wealth Management by email at invest@skylinewealth.ca or by phone at 1 (888) 977-7348.
Wayne Byrd
Chief Financial Officer
Skyline Group of Companies