Increased Capital Gains Inclusion Rate

Introduction

The federal government has proposed an increase in the capital gains inclusion rate from 50% to 66.67%. This proposal would impact the taxation of profits from the sale of capital assets, such as cottages or investment properties.

Calculating Capital Gains

Capital gains are the profits you earn when you sell a capital asset, such as a cottage, for more than its original purchase price. The capital gain is calculated as the difference between the sale price and the adjusted cost base (ACB) of the asset. Currently, only 50% of capital gains are included in your taxable income. The proposed increase to 66.67% would mean that a larger portion of your capital gains would be taxed.

Example

Let's consider an example to illustrate the impact of the proposed change. Assume you sell a cottage for $800,000, and your ACB is $405,000. * Under the current rules (50% inclusion rate), your capital gain would be $395,000 (800,000 - 405,000). Since only 50% of this gain is included in your income, your taxable capital gain would be $197,500 (395,000 x 0.5). * Under the proposed rules (66.67% inclusion rate), your taxable capital gain would be $263,340 (395,000 x 0.6667). As you can see, the proposed increase in the inclusion rate would result in a higher tax liability for capital gains.

Principal Residence Exemption

It's important to note that the principal residence exemption still applies. This means that you can sell your primary residence tax-free, regardless of the capital gains inclusion rate. However, any capital gains on a cottage or investment property will be subject to taxation under the proposed rules.

Conclusion

The proposed increase in the capital gains inclusion rate is a significant change that would impact the taxation of profits from the sale of capital assets. It's important to be aware of this proposal and its potential implications for your financial planning.