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When Canadian's Gain to lose, Capital Gains and the 2024 Canadian Federal Budget

INTRODUCTION:

The recently unveiled 2024 Canadian Federal Budget has sparked significant discussions and debates across the country. One of the key highlights of this budget is the proposed changes to the capital gains tax, particularly as it pertains to the real estate market. (this does not include the primary residence) Let's dive in and explore the potential effects it may have on the Canadian real estate sector.

OVERVIEW OF THE NEW CAPITAL GAINS TAX:

The new 2024 Canadian Federal Budget introduces changes to the capital gains tax aimed at addressing wealth inequality and generating additional revenue for government programs. Under the new provisions, the capital gains inclusion rate will be increased from the current rate of 50% to 75%. This means the individuals who realize captal gains from the sale of assets, including real estate, will now be required to include 66.67% of the gain in their taxable income. 


So let's break this down. The 2024 budget would increase the "inclusion rate" from one-half, to two thirds on capital gains above two hundred and fifty thousand dollars for individuals who sell their assets. So, for the first $250,000.00 in capital gains, an individual tax payer would continue to pay taxes on 50% of the gain.  For every additional dollar beyond $250,000.00, two thirds will be taxable.

example:

  • Before 2024 Canadian Federal Budget
  • 50% of your gain was taxable
  • taxable gain $500,000.00 x 50% = $250,000.00
  • Tax owed :$250,000 x 50% = $125,000.00

  • After the 2024 Canadian Federal Budget
  • taxable gain first $250,000.00 x 50% = $125,000.00
  • Next $250,000.00 gain x 66.67% = $166,667.00
  • New total taxable gain is $291,667.00
  • Tax owed now is: 291,667.00 x 50% = $145,833.00
Under the new budget the new capital gains tax will be an additional $20,833.00 leaving you with a sick feeling in the pit of your stomach.

So what is the impact this is going to have on the real estate market? 

The real estate market in Canada is a significant driver of economic activity and wealth creation.  The changes to the capital gains tax are expected to have a notable impact on this sector. Here are some potential effects:


1. Slowing Down of Real Estate Transactions; 

The increase in the captial gains inclusion rate may lead to a slowdown in the real estate transactions as property owners may be less inclined to sell their assets if they are facing higher tax liabilities.  This could result in reduced inventory and potentially drive prices higher due to limited supply.

2. Shift in Investment Strategies:
 
Investors in the real estate market may reconsider their investment strategies in light of the new tax regime.  Some may opt to hold onto their properties for longer periods to defer tax obligations, while others might explore alternative investment options that offer more favourable tax treatment.

3. Impact on Housing Affordability

Higher capital gains taxes could have implications for housing affordablility, especially in hot real estate markets where prices are already inflated.  The increased tax burden on property sales may make it more challenging for individuals, particularly first-time homebuyers, to enter the market.

4. Regional Variances:

The effect of the new capital gains tax will likely vary across different regions in Canada. Markets with high levels of speculative investment and rapid price appreciation, may experience more pronounced impacts compared to regions with more stable and affordable housing markets.


The changes to the captial gains tax outlined in the 2024 Canadian Federal Budget have the potential to reshape  the real estate landscape in the country.  While the full extent of the imapcts remains to be seen, stakeholders in the real estate market should closely monitor developments and adapt their strategies accordingly.  As the government aims to strike a balance between revenue generation and economic growth, it is crucial for industry players to navigate the evolving tax landscape with prudence and foresight.


written by: Sherry Zwetsloot - Real Estate Broker
 

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