Navigating the Capital Gains Tax in Ontario: What You Need to Know

As an Ontario resident, staying informed about tax regulations is essential for effective financial planning. A key area to consider is the capital gains tax, particularly with the new changes in effect as of June 25th, which could affect your investments and overall financial strategy. 

What You Need to Know About Capital Gains Tax 

Capital gains tax is levied on the profit made from selling an asset that has appreciated in value, such as stocks, bonds, real estate, and other investments. Traditionally, 50% of the capital gain was included in your taxable income. For example, if you sold an asset for a $10,000 profit, only $5,000 would be subject to tax. 

Recent Changes in Capital Gains Tax: Key Updates 

The 2024 federal budget has introduced changes to the capital gains inclusion rate, effective June 25th. These changes could significantly impact your investments and overall financial strategy. 

Key Changes to Note

• Affected Entities: The adjustments will affect all corporations and trusts regardless of value and individuals with capital gains of $250,000 or more.  
• Increased Inclusion Rate for High Gains: Individuals with more than $250,000 in capital gains per year will be subject to an additional inclusion rate of 66.67% (two-thirds). In this case, the first $250,000 in capital gains will be subject to the existing 50% capital gains tax rate, and the remainder will be subject to the new two-thirds inclusion rate.  
• Primary Residence Exemption: Capital gains tax does not apply to your primary residence. However, these changes could affect you if:
• You sell a secondary property – such as a cottage, rental, or investment property – and earn more than $250,000 in profit from that sale.  
• You sell investments for $250,000 more than the original purchase price.

Impact on Real Estate Investors 

Small-scale real estate investors, especially those owning secondary rental properties or recreational homes, will be notably affected by the new capital gains tax inclusion rate. The primary residence remains exempt, but the sale of other properties will face higher tax rates. 

Example Scenario 

Consider an investor selling a cottage for a $400,000 profit. Under the new regulations: 

• The first $250,000 of profit will be taxed at the 50% inclusion rate, adding $125,000 to their taxable income. 
• The remaining $150,000 will be taxed at the 66.67% inclusion rate, adding $100,005 to their taxable income. 

Strategic Management of Capital Gains 

Given these changes, strategically managing your investments and capital gains is more important than ever. Here are a few tips: 

• Timing is Everything: Consider the timing of your asset sales. Spreading out the sale of assets over multiple years can help keep your taxable income in a lower bracket, reducing the overall tax burden. 
• Use of Registered Accounts: Utilize registered accounts such as the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). Gains realized within these accounts are either tax-free (TFSA) or tax-deferred (RRSP), which can significantly enhance your long-term returns. 
• Offset Gains with Losses: If you have investments that have not performed well, consider selling them to realize a capital loss. These losses can be used to offset capital gains, reducing the taxable amount. Losses can also be carried back three years or forward indefinitely to apply against gains in other years. 
• Obtaining Professional Advice: Given the complexity of tax rules and the recent changes, consulting with a real estate agent is highly recommended. They can provide personalized advice based on your specific financial situation and help you develop a tax-efficient investment strategy. We can assist in timing your sales strategically, navigating the regulatory landscape, and identifying potential deductions and credits that can minimize your tax burden.