Recent changes to Canada's capital gains inclusion rate have sparked fresh confusion among some property owners about how this will affect them, while others are just realizing for the first time that the capital gains tax might apply to them after all.
Anyone who owns a second house or condominium should already know that the tax applies to the sale of those properties. What people might not realize is that it also applies when an ownership of an eligible property or investment is transferred or "passed down" to, for example, children or grandchildren.
Or, they might be surprised to learn that the tax applies to the sale of something like a cemetery plot, a hunting camp, a collection of rare baseball cards or a painting.
Here are some of the lesser-known ways the capital gains tax might apply to you, and expert tips for navigating it.
How it works
The capital gains tax applies to most properties and investments whose value increases over time and which are sold for a profit. Some things that gain value are exempt from this specific tax, such as primary homes and goods purchased and sold as part of a personal business.
If you sell something that is not exempt from capital gains taxation and the sale nets you a profit of $1,000 or more, 50 per cent of that profit – or capital gain – is subject to capital gains taxation. That rate of 50 per cent is known as the inclusion rate. As of June 25, if you pocket more than $250,000 or more in capital gains in a year, your inclusion rate jumps to 67 per cent for the portion above that threshold.
Cottages and land
John Fincham is a Re/Max sales representative based in Parry Sound-Muskoka, the heart of Ontario's cottage country, and frequently fields questions about the tax and recent changes to the inclusion rate from nervous property owners.
"I'm getting more calls about large acreages or hunt camps or cabins way back in the bush," Fincham told CTVNews.ca in an interview over Zoom. "I think there's a lot of confusion because they don't know how much it's going to affect them."
The capital gains tax does not apply to primary homes, but it does apply to secondary homes and investment properties such as cottages, hunting camps and empty land.
Fincham said it also applies — based on the increase in property value — when one of these properties is gifted or bequeathed to someone else, even if no money is exchanged. This means either the person gifting the property or the person receiving it needs to have money set aside to pay the tax at the time of the transfer.
For properties that have appreciated by more than $250,000, the amount of money required to pay the tax if that property is gifted or bequeathed instead of sold is now higher as of June 25.
Burial plots
Another piece of property some people might not realize is subject to capital gains taxation is the one that's meant to be your final resting place, explains Toronto-based financial advisor Jason Pereira.
If, for some reason, a person decides to sell or gift their burial plot and it has gained $1,000 or more in value since they bought it, the capital gains tax applies.
"At the end of the day a burial plot is property just like everything else," Pereira told CTVNews.ca in an interview over Zoom.
"If you die and go into it, you're not subject to (the tax). But the reality is, if you sell it, you made a profit by speculating on it, essentially."
Collectibles and listed personal property
Capital gains taxation applies not only to land and real estate, but also to artwork and other collectibles whose value increases over time.
These items fall under the category of "listed personal property," and if they've gained $1,000 or more in value since you purchased them, they could be subject to capital gains taxation.
In Canada, "listed personal property" includes items such as prints, etchings, drawings, paintings, sculptures, rare folios, manuscripts or books, jewelry, coins and stamps.
If you're a business owner and these items are considered inventory or business expenses, they should be exempt from capital gains taxation, Pereira said.
"But if you're just a collector and you have this rare hockey card that you made a bunch of money off of, it's up to the capital gains if it's north of $1,000."
Since the average Canadian does not own troves of valuable paintings, sculptures, jewels and manuscripts, Pereira said most people don't have to worry about the capital gains tax on personal listed goods.
"What we're really talking about here is the higher-end collectables," he said. "So we're talking about people at a certain threshold."
Caught off guard by capital gains?
Pereira said anyone surprised to learn something they want to sell is subject to capital gains taxation should just be prepared to deduct the tax from their profit on that sale.
If you've just realized you'll need to pay a significant capital gains tax bill on a property you're planning to give to someone, or you're worried your next-of-kin will be stuck with that bill when you die, he said there are a few ways to minimize future headaches.
One is to liquidate other assets — investments or otherwise — to raise the cash needed to cover the tax bill. Another is to opt for a life insurance policy that covers capital gains taxation in the event of the property owner's death. A third option is to borrow money against the value of the property, to be paid over time or when the property is sold.
"At the end of the day, that bill is due," Pereira said. "So those are your options. It's either save now, don't save now and pay later through debt … or buy an insurance policy to reduce the burden."
One thing Pereira said will not work is to try and avoid paying the tax by living in your cottage or secondary home for a period of time before selling or gifting it.
"The way it works is that for every year that you own property, it's as if you get a chip that says, 'This is a chip for one year's worth of free taxation,'" he said.
"So if I own a cottage and a house simultaneously and I go to sell it, I got to cash in those chips. I can choose whichever (property) I want to, the cottage or the home, but at the end of the day … I can only use those chips on one."
Correction:
This story has been corrected to state that the new capital gains inclusion rate applies to the portion of capital gains exceeding $250,000.
