Federal Budget 2024: Capital Gains and Home Ownership

The federal budget tabled on April 16 introduced new provisions for calculating capital gains tax, as well as measures to facilitate access to home ownership. In this article, we explain these changes and their impact on your portfolio. But also, if these measures enable you to realize your dream of buying your first home.

First, new provisions for the capital gains inclusion rate have been introduced. The aim is to make the wealthiest Canadian residents pay more tax. More specifically, this measure, which will come into effect on June 25, 2024, is expected to affect around 40,000 people, or about 0.13% of the wealthiest Canadians.

But first, what is a capital gain? The capital gain is the difference between the purchase price (acquisition cost) and the sale price (disposition cost). If the sale price is higher than the purchase price, it’s a capital gain. Conversely, it’s more a question of capital loss.

We’re talking here about non-registered investments, secondary residences (e.g., cottages), rental properties (plexes) or other types of investments, with the exception, of course, of principal residences and registered accounts (e.g., mortgage accounts). ( RRSP, TFSA or FHSA).

However, you won’t pay tax on the entire capital gain. Currently, only half (50%) of the capital gain is taxable. This is the important distinction between the inclusion rate and the tax rate. As a result, capital gains are taxed differently (and more advantageously) than income from salaries and interest income.

For example, you need to liquidate your entire $50,000 portfolio of stocks and exchange-traded funds (from a non-registered account). The shares had been purchased 10 years ago for $30,000. The realized capital gain will be $20,000. With a 50% inclusion rate, the taxable capital gain will be $10,000. Your annual income is $75,000, so your marginal rate is 36.12%. As a result, you will have to pay $3,612 in tax on the capital gain realized on the sale of your investments.

As of June 25, the tax inclusion rate on capital gains realized by individuals will increase from one-half (50%) to two-thirds (66.67%). However, the first $250,000 of capital gains in the year will be protected at the 50% inclusion rate.

This new measure has no impact on the capital gains you realize on the sale of a principal residence or on gains realized on investments within a given registered account (RRSP, TFSA, etc.). These capital gains remain tax-exempt, except for the RRSP, which will be taxed upon withdrawal (no change here).

According to federal government estimates, this new measure should affect around 0.13% of the wealthiest Canadians (about 40,000 people) and bring in nearly $20 billion in tax revenue (source: Le Devoir).

Let’s take a simple example. You’ve owned a cottage for 10 years, with a purchase price of $200,000. Today, you’re selling your cottage for $500,000. To simplify the example, let’s assume a single owner, with no rental income, no improvements, no real estate brokerage fees on sale and no other fees that would increase the adjusted cost base. Thus, the capital gain realized after the sale of the $500,000 cottage would be $300,000, half of which ($150,000) is taxable. If the sale of the cottage had instead taken place after June 25, 2024, then the taxable capital gain would have been $158,335 (50% of $250,000 and 66.67% of $50,000). Depending on your marginal tax rate, that’s a difference of a few thousand dollars in tax payable.

To find out more about investing or capital gains for individuals and businesses, consult our personal finance guide.

In the federal budget of April 16, new measures were announced to facilitate access to home ownership. These changes include an increase in the HBP withdrawal limit and an increase in the amortization of insured mortgages for new construction. In some cases, these measures can help you buy your first home, if that’s your goal.

If you’re thinking of buying your first home, you can use part of your RRSP to help you make the down payment. The Home Buyers’ Plan (HBP) allowed you to withdraw up to $35,000 from your RRSP ($70,000 for a couple) to build or buy a qualifying home. You were then required to repay the amount withdrawn within a maximum of 15 years, starting in the 2nd year following the withdrawal.

But this withdrawal limit for the HBP (RRSP) has just been increased, and the grace period for repayment extended.

It is now possible to withdraw up to $60,000 from your RRSP under the HBP ($120,000 for a couple). Then, the HBP repayment period will begin 5 years after the withdrawal rather than 2 years.

Note that the measure concerning the HBP repayment period applies to people who have made or will make a withdrawal between January 1, 2022 and December 31, 2025.

Combined with the FHSA, a couple could have access to $200,000 for a downpayment on a first qualifying home.

Secondly, another measure has been introduced to facilitate access to home ownership and reduce the current pressure on borrowers. This is the amortization of mortgages insured by CMHC (Canada Mortgage and Housing Corporation).

CMHC-insured loans can now be repaid over 30 years instead of 25. However, this measure only applies to first-time buyers of new-build property.

This new measure to facilitate access to home ownership will come into force on August 1, 2024.

To learn more about real estate, consult the “real estate” section of our personal finance guide.

In summary, several changes have been announced in the federal budget. Certain provisions have an impact on your portfolio, such as the increase in capital gains tax. Other measures to facilitate access to home ownership include increasing the HBP (RRSP) withdrawal limit and increasing the amortization of insured mortgages for new construction.