Middle-class Canadians could be hit by increases to capital gains tax. Here’s how to prepare

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Middle-class Canadians will not be immune from the effects of the federal budget’s increase to capital gains taxes, despite the government’s contention that the changes will affect only the country’s wealthiest people.

Currently, 50 per cent of a person’s capital gains in a given year are taxable as income. As of June 25, two-thirds of capital gains over $250,000 will be taxable under new rules introduced in the 2024 federal budget. The policy will have the greatest effect on the wealthiest Canadians who have large amounts of money tied to investment earnings that are outside of sheltered tax accounts, such as a registered retirement savings plan or tax-free savings accounts.

The government estimates that just over 0.1 per cent of Canadians will be affected by the tax change this year. However, many more Canadians could face tax increases for a year where they have a big financial event, such as the sale of an investment property, family cottage or a large one-time selloff of a person’s retirement portfolio.

Tim Cestnick: Change to capital gains taxes will catch many average Canadians

“I think the statement from [Deputy Prime Minister] Chrystia Freeland that there will be no increase in taxes for the middle class is not exactly correct,” said John Oakey, vice-president of taxation at the Chartered Professional Accountants of Canada.

“Those one-time events that create a lot of capital gains in one year can push people in the middle class above the threshold and increase their taxes.”

Brian Ernewein, a senior tax adviser with KPMG, said there may be little that Canadians can do to mitigate their new tax bill when it comes to selling housing that does not qualify as their primary residence.

Still, John Pasalis, president of Realosophy Realty in Toronto, said more investors might now be inclined to purchase an investment home as an individual, rather than a corporation, since the proposed tax increases are even larger for corporations and trusts. Under the new rules, corporations will have all their capital gains subject to the 66-per-cent inclusion rate, rather than just the gains over $250,000 as for individuals.

In the short term, there may be a marginal increase in people who are more motivated to sell if they were already considering offloading an investment property. But the June 25 deadline to sell is a very short window to list a home, find a buyer and close the deal.

Meanwhile, Mr. Oakey said Canadians that could book more than $250,000 in capital gains on a large stock sell-off will fall into two groups: those who need to sell immediately, and those who have time to plan and avoid higher tax rates.

Very few Canadians would have $250,000 of taxable capital gains, since the lion’s share of Canadians invest in tax-sheltered accounts like RRSPs and TFSAs, which are exempt from capital gains taxes and where people can accumulate hundreds of thousands of dollars in contribution room over the course of their working life.

Some diligent savers may max out their tax-sheltered accounts and accrue gains in non-sheltered accounts that are over the $250,000 threshold. If those investors ever need to sell their assets immediately, an increased tax bill may be unavoidable.

But people with time on their side have some options, the simplest of which is selling your assets over the course of many years so that your capital gains remain under $250,000 in each year.

Aaron Hector, a Calgary-based financial planner with CWB Wealth, said estate planning could become one of the biggest concerns for people who have invested outside of tax-sheltered accounts, since their investments are essentially sold and the tax is realized at the time of their death.

“This tax change is going to be staring at them in the face, and what they could do is, every year, sell enough of their portfolio to get close to the $250,000 capital gain limit without going over,” Mr. Hector said.

“It’s a matter of averaging your way out of these positions over many years so that you don’t have a big event in one single year, whether that’s when you pass away or otherwise.”

When it comes to the government’s options for increasing taxes, Mr. Oakey said increasing capital gains in this method is much simpler than introducing a wealth tax, and will be less of a deterrent on investment for Canadian companies than a excess-profits tax for corporations.

More bluntly, Mr. Ernewein called it the “less bad” option compared with other methods of increasing taxes.

Mr. Pasalis said it’s unlikely the changes will have a long term impact on investor behaviour in the real estate market because the change in taxation is too small.

“People are still pretty bullish on real estate and it’s only going to impact gains over $250,000 so I don’t think it’s going to ice the exuberance and excitement that people have with real estate in Canada,” Mr. Pasalis said.

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