This is a case study about several Toronto investors who hold identical assets with identical accrued capital gains. Until June 25, 2024, their tax treatment would have been similar, but after June 25, 2024 it will differ quite significantly. The difference in tax will not be based on the investors' ability to pay.

In the April 16, 2024 Budget Announcement, the Canadian Federal Government proposed an increase to the capital gain inclusion rate for gains realized on or after June 25, 2024 as follows:

• for individuals, capital gain up to $250,000 will be subject to the current inclusion rates (one half), but capital gain in excess of $250,000 will be subjection to the new inclusion rates (two thirds);

• for corporations and trusts, all capital gain will be subject to the new inclusion rates (two thirds).

The proposed rules favour personal ownership vs. corporate ownership and encourage joint ownership with family members. On June 25, 2024, the affected taxpayers will see an overnight tax hike of up to staggering 8 percent, from the current maximum effective tax rate of up to 27% to ~35% in Ontario.

The government officials have stated that only the selected "rich" or "top 0.13%" Canadians will be affected by the tax hikes. We do not agree. The examples below include both "rich" and "regular" taxpayers.

Real Estate Investors: Joined Owner Joe, Single Owner Sandra, Corporate Cam

Joe, Sandra and Cam are real estate investors in their 60s. Just like 4.4M other Canadians, they invested in a real estate property to save for a retirement. All live in Toronto, all are married, employed full-time, and earn $100,000/year. The three couples are comfortable financially, but it's hard to call them "rich" given Toronto's high cost of living.

Image by Dall-E: Joint Owner Joe and Jill, Sole Owner Sandra and Sam, Corporate Cameron and Cindy are ready to sell their North York investment properties and retire.

In 2009, the three couples borrowed money to purchase three side-by-side identical townhouses in North York, ON for $400,000 each. All six worked extra hard, saving every penny to pay off the mortgage loans. Luckily, their townhouses grew in value by $500,000 over the last 15 years and are worth $900,000 now. The three couples now wish to dispose of their properties to pay for their retirement.

Until June 25, 2024, the couples' tax exposure from the sale of the townhouses would have been roughly similar, ranging from $112,000 to $132,000.

Starting from June 25, 2024, the couples' tax liability from the sale of their townhouses will differ quite drastically - from $112,000 to $183,000 - depending on the how they chose to hold their property when they purchased it 15 years ago.

Joined Owners Joe and Jill: $112,000 in Tax, not Affected by Proposed Rules

Joined Owner Joe is married to Jill. Like Joe, Jill earns a salary of $100,000/year. Both Joe and Jill are the owners of the townhouse. They listed the townhouse for sale and found a buyer. The buyer is asking for a June 25, 2024 closing date.

Joe and Jill together will realize $500,000 in capital gain, but each of them will realize $250,000, which will still be subject to tax under the old inclusion rates.

If Joe and Jill close the sale on before June 24, 2024, before the proposed rules are supposed to take effect, each of them will pay approximately $77,000 in tax in 2024: $21,000 on their salaries and $56,000 on capital gain. Overall, the sale of the townhouse will result in $112,000 tax for Joe and Jill's family.

If Joe and Jill close the sale on or after June 25, 2024, after the proposed rules are supposed to take effect, their tax liability will not change.

Sole Owner Sandra: Tax Increase from $122,000 to $145,000

Sole Owner Sandra is married to Sam. Like Jill in the example above, Sam earns a salary of $100,000/year. Although the couple share finances, Sandra is the sole owner of the townhouse. Sandra listed the townhouse for sale and found a buyer. The transaction closes on June 25, 2024.

Sandra will realize $500,000 in capital gain. Only $250,000 will be subject to tax at the "old" inclusion rates, but the remaining 250,000 will be subject to the new inclusion rates.

If Sandra closes the sale on or before June 24, 2024, she will pay approximately $143,000 in tax in 2024: $21,000 on her salary and $122,000 on capital gain from the sale of her townhouse.

If Sandra closes the sale on or after June 25, 2024, she will pay approximately approximately $166,000 in tax in 2024: $21,000 on her salary and $145,000 on capital gain from the sale of her townhouse.

Corporate Cameron: Tax Increase from $132,000 to $183,000

Corporate Cameron wanted an additional limited liability protection when he was purchasing the townhouse in 2009. This is why he purchased the townhouse through a newly created holding corporation, CameronCo. CameronCo listed the townhouse for sale and found a buyer. The transaction closes on June 25, 2024. Once sold, CameronCo will pay out the proceeds as dividends to Cameron and dissolve.

CameronCo will realize $500,000 in capital gain. All $500,000 will be subject to tax at the "new" inclusion rates.

If CameronCo closes the sale on or before June 24, 2024, Cameron and CameronCo together will pay approximately $132,000 in tax related to the sale of the townhouse ($48,000 corporate and $84,000 in personal tax).

If CameronCo closes the sale on or after June 25, 2024, Cameron and CameronCo together will pay approximately $183,000 in 2024 ($65,000 in corporate and $118,000 in personal tax).

Early Earl and Late Liam: Tax Increase from $226,000 to $316,000

If you think Cameron is unlucky, consider the example of Early Earl and Late Liam. Earl and Liam are both 120 years old and are unfortunately, quite unwell. Both held their lifetime savings - an investment portfolio with $1,000,000 accrued gain. Sadly, Earl passed away on June 24 2024, and Liam passed away on June 25, 2024. Earl's terminal return tax liability will be approximately $226,000 in tax, but Liam's - ~$316,000.

Emigrant Emmett: Tax Increase from $760,000 to $1,002,000

Consider also Emigrant Emmett. Unlike the taxpayers used in previous examples, Emmett is "rich" by most people's standards. Emmett has an investment portfolio with a $3,000,000 accrued gain. Emmett earned his wealth by being a talented IT guru. He pays Canadian tax at a highest marginal rate (54%). After the COVID-19 pandemic, Emmett was able to do his job remotely from countries with lower personal tax rates. Earlier this year, Emmett decided to move to the US and booked a flight to leave Canada on June 24, 2024. Emmett will pay Canadian departure tax at the "old" rates - approximately $760,000.

If Emmett's flight is delayed due to bad weather and he leaves at 00:01AM on June 25, 2024, his tax bills increases to $1,002,000. Emmett will be very unhappy with his departure tax, but comforted by the fact that, for his future investments, the maximum capital gain rate in his new home jurisdiction in only 20% (as opposed to ~35% in Canada).

Conclusion

The proposed tax hike will have significant impact on many regular Canadians, especially those with retirement savings that must be realized all at once (either through a real disposition by way of a sale or a gift, or through a deemed disposition triggered by an emigration or death).

Without proper planning, at midnight on June 25, 2024, these Canadians' tax exposure may increase significantly, sometimes disproportionately to other Canadians with the same or better ability to pay.

These affected Canadians have only 9 weeks left to obtain tax advice from their tax professionals, but the relevant draft legislation is not even available.

Canadians who hold their savings in investment portfolios, even the "richest" ones, will generally have control over how much capital gain they trigger every year (more than $250,000 or less) and will be less affected by the proposed rules. More planning opportunities will be available to them as opposed to real estate investors.

Important Disclaimer

All tax dollar amounts used in the article are approximate. We are tax lawyers, not tax accountants. We used this online tax calculator for our estimations. If you spotted a serious tax calculation mistake, please email us at ask@advotaxlaw.ca.

The case studies in this article are based on the general language used in the Budget announcement and not on the actual legislation, which is not available as of today, April 18, 2024. The proposed legislation must pass in the House of Commons and the Senate before it becomes the law.

When the draft or actual legislation becomes available, we may have to revise the views expressed in this article. Please subscribe to our blog to stay up to date on the newest developments in capital gains tax.

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Nothing in this article constitutes legal advice and no solicitor-client relationship is created. If you require legal advice pertaining to your specific situation, please contact our tax lawyer. ​ 

Please note that this post is only as current as its publishing date indicates, but the relevant rules - and guidance on their interpretation - change constantly.  

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