Recently, new changes came into effect for the capital gains tax in Canada. Some Canadians are worried about the changes to the laws. They think these laws will affect their financial plans. However, financial advisers and tax law experts say these changes won’t impact most people. Below, we’re going to go through what the changes are, how they will affect the few that are impacted, and why the changes were put in place.
What are capital gains?
Capital gains are the profits investors make when selling something for more than they paid for it. These items can be stocks, bonds, real estate, or other investments. The gain is the difference between the selling price and the buying price. This gain is taxable and is subject to different tax regulations than regular income.
Important changes to Capital Gains Tax in Canada
The federal government has recently introduced several changes to the capital gains tax in Canada. These changes are in effect as of June 25th, 2024.
Increased inclusion rate
Previously, if you earned over $250,000 in capital gains for the year, the tax rate for the gain over and above that was 50% now it’s jumped to 67%.
Adjusted exemptions
The Lifetime Capital Gains Exemption (LCGE) has changed. In an individual’s lifetime, up to $1.25 Million in capital gains earned on the sale of small businesses and qualified farm or fishing properties is now exempt. That’s an increase from $1 Million. As of 2026, it will float with the inflation rate.
New reporting requirements
New rules now exist for taxpayers who make money selling certain homes and rental properties. These taxpayers need to give more detailed information when they file their taxes. The goal is to make everything clearer and ensure people follow the rules.
Enhanced anti-avoidance rules
More significant anti-avoidance rules are now in place. The government wants a fairer tax system. These rules stop taxpayers from using complex structures or transactions to avoid paying their fair share of taxes. This includes extending the tax reassessment period for suspected filings an additional three years.
Who will these changes impact most?
There are a select few who will be impacted most by these changes. The two main groups that will be affected. The first is those who rely heavily on income from investments. The second is those heavily invested in real estate. In particular, foreign homeowners who are buying homes as an investment strategy (speculative investors) and those who renovate and then sell homes as a way to make money. The goal of focusing on real estate is to address the housing affordability crisis by mitigating the potential for vacant homes and homes being renovated just to inflate prices. While the main purpose of these changes is towards investors and businesses, those who own second homes, such as a cottage, will be required to pay more tax as well.
What these changes will not impact
These changes were purposely designed not to impact regular retirement strategies such as RRSP, RRIF, TFSA, FHSA, or RESP. CPP, OAS, and other pension plans will also remain unchanged. Finally, there is no change to tax regulations on the sale of a principal residence.
Tax implications for retirement planning
The capital gains tax does not impact retirement accounts like RRSPs and TFSAs, as these accounts are tax-sheltered. This is good for Canadians who have invested in these accounts for their retirement savings. It gives them some sense of security and predictability for their future financial plans. However, these changes can impact retirement income. They do this by altering the returns on investments after taxes. This could influence how retirees withdraw funds from their accounts and when they do it.
Potential Impact on retirement goals and timelines
Although for the most part, the capital gains tax changes will not affect the retirement of most Canadians, we will dive into how it might impact the retirement plans of some people.
Delayed retirement age
With higher taxes on investment returns, some people may find that they need more time to gather enough money for retirement. This could mean working additional years beyond their original planned retirement age.
Adjusted lifestyle expectations
Retirees often rely on investment income to supplement their regular retirement income. With reduced net returns because of higher taxes, a few people may need to adjust their lifestyle expectations or look for alternative sources of income, such as part-time jobs or downsizing their homes.
Increased importance of financial planning
Given these changes, comprehensive financial planning becomes even more critical. Regularly reviewing and adjusting your portfolio can help ease some effects of increased taxes. Also, consulting with financial advisors who understand the nuances of tax laws can provide valuable insights into improving your investment strategies under the new tax laws.
Avoid relying on capital gains to escape debt
Many of us experience financial hardship at one time or another. It’s at these times that some people turn to selling assets, like secondary homes, to make it through. With these changes to the capital gains tax in Canada, these assets won’t yield as much cash flow as they once did. Similarly, it can also mean less transfer of wealth to your loved ones than expected. Making it more important than ever to be as prepared and financially sound as possible.
Alternative strategies for debt reduction
Considering the difficulties of depending only on capital gains as a debt-free retirement plan, it’s wise to look at other approaches. These other methods can provide more stability and reliability in handling debt.
Budgeting and expense management
A fundamental approach to debt management involves meticulous budgeting and expense management. By tracking income and expenses closely, you can identify areas where you can cut costs and redirect savings toward paying down debt. This method requires discipline but provides a steady path toward reducing liabilities without exposing yourself to market risks.
Debt Management Plan
Consider a debt management plan as a viable option to control debt. This plan involves consolidating multiple debts into one monthly payment. They offer significantly reduced interest rates and waived fees. The goal is to make debt repayment more manageable and help you become debt-free in three to five years.
Increasing income streams
Diversifying income streams is also an effective strategy for managing debt more effectively. Taking on part-time work or freelance opportunities can generate additional cash flow that can be directed toward repaying your outstanding debts faster.
Financial counselling
Seek advice from a certified financial counsellor or advisor. They can give valuable insights tailored to your situation. These experts help you create personalized plans. These plans are designed around achievable goals. The experts consider your income level and credit history when making these plans.
Final thoughts
The changes to the capital gains tax in Canada present challenges and opportunities. The best way to move forward is to stay informed and be proactive. Understand these changes and implement strategic financial planning measures. Consult with tax professionals or financial advisers if needed. This is especially true if you’re considering selling assets. They will help you adapt effectively to this evolving financial landscape.
