A new capital gains tax inclusion rate will be effective starting June 25. Until then, individuals selling secondary properties will pay tax on 50 per cent of any capital gains. After this date, they will be taxed on 50 per cent of the first $250,000, and 66.7 per cent of the remaining amount.
This change has raised concerns among real estate investors, agents, and owners of vacation and secondary properties.
What is a capital gains tax?
A capital gains tax is applicable to the profit made when selling an asset for more than its purchase price (excluding expenses). It does not apply to primary residences, as the profit from selling one’s primary residence is not taxable.
This tax is only relevant to properties that are not primary residences, such as cottages, vacation condos, and rental properties. For properties sold by trusts or corporations, 100 per cent of capital gains are taxed at a rate of 66.7 per cent.
The percentages do not mean sellers are giving up two-thirds of their profits. Instead, up to two-thirds of their profits are subject to tax at their individual tax rate for that year. Sellers can also deduct most expenses from the final taxable amount.
Impact on Cottage Owners
Let’s take the example of a cottage owner who bought their property 20 years ago for $250,000 and is selling it this summer for $750,000, resulting in a $500,000 gain. After deducting $53,000 for renovations and selling expenses, their profit is $447,000.
- 50 per cent of the first $250,000 is taxed ($125,000)
- 66.7 per cent of the remaining $197,000 is taxed ($131,399)
This results in a total of $256,399, which is added to the seller’s annual income and taxed at their marginal tax rate. This means an increase of about $33,000 compared to what the seller would have paid before June 25.
Implications for the Real Estate Market
As the new tax rate comes into effect, the actual impact on the market is yet to be determined. Reports suggest that some individuals are rushing to sell their cottages, but it may not solely be due to the capital gains tax. Additionally, the timing aligns with the popular season for selling vacation properties.
Julia Cresiun, an agent at Right at Home Realty, mentions that property owners have had limited time to list their properties due to the short notice and challenging market conditions.
Long-Term Property Holding
Owners may choose to hold onto their properties longer, possibly until retirement or when their financial situation changes significantly. If they decide to sell, they might incorporate the extra cost into the selling price, potentially inflating average prices and making properties harder to sell.
Decreased Interest in Investment Properties
The increase in the capital gains tax may discourage individuals and corporations from investing in Canadian business, investment, or recreational properties. This shift could lead to a reduction in available rental inventory and a decline in investment property purchases.
Impact on Small Real Estate Investors
The tax change aims to limit profits made through residential real estate investments, affecting smaller investors like families who use properties for retirement savings or to support their children. Sean Miller, an agent at Property.ca, emphasizes the unfairness of this change, highlighting the challenges it poses for investors in the current market.
Overall, the increased capital gains tax rate reflects the government’s efforts to generate revenue post-pandemic, but its full consequences are yet to be seen.
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