By Diane Amato

Published April 19, 2024 • 4 Min Read

Canada’s recently unveiled 2024 budget proposes to adjust the capital gains inclusion rate. What does this mean for investors and taxpayers? Read on to find out how these changes might affect you.

TLDR

• When you sell an asset or investment for more than it cost you, you have a capital gain

• Today, 50% of capital gains are taxable for all individuals and businesses

• As of June 25, the capital gains tax inclusion rate is set to increase from 50% to 66.67%  for all capital gains realized by corporations and trusts, and for capital gains over $250,000 realized by individuals

What are capital gains?

When you sell an asset or investment for more than you paid for it, that difference is your capital gain. For example, say you bought a cottage for $400,000 and two years later, sold it for $500,000. You have a capital gain of $100,000. On the flip side, when you sell an asset for less than you bought it for, you have a capital loss.

You can realize capital gains and losses on several types of investments and property, including stocks, bonds, shares in mutual funds, rental properties, cottages, even business equipment. Capital gains and losses do not apply to your primary residence.

What is capital gains tax?

In Canada, capital gains are taxable. How much tax you pay depends on a few factors. That’s because the value of a capital gain is treated as income during the year in which you realized it – in other words, in the year you sold your investment or property. But it’s not the full value of the gain that gets taxed – rather it’s only a portion.

The capital gains tax inclusion rate – today and tomorrow

Today, only 50% of the capital gain is taxable (this is known as the capital gains tax inclusion rate). This means that $50,000 of the $100,000 earned from the sale of the cottage in our example is added as income for that tax year.

Here’s an example:

• Your regular income, earned from your full-time job, is $75,000

• You make a $100,000 profit from the sale of your cottage (after you pay real estate fees, closing costs, etc.)

• 50% of the profit is taxable, which means you add $50,000 to your income during the tax year in which you realized this capital gain

• $75,000 + $50,000 = a total income for that tax year of $125,000

The amount of tax you ultimately pay in that year will depend on your tax bracket and its marginal tax rate.

If this budget is passed, the capital gains tax inclusion rate is set to change. The federal government’s 2024 budget proposes a few modifications to how capital gains are taxed. Here’s a rundown of the changes:

• For all corporations and trusts, the capital gains tax inclusion rate will increase to 66.67% – up from 50%.

• For individuals with gains over $250,000, the capital gains tax inclusion rate will increase to 66.67% – up from 50%.

• For individuals with gains under $250,000, the capital gains tax inclusion rate will stay the same, 50%.

Who will the changes affect?

The adjustments will affect all corporations and trusts regardless of value, as well as individuals with capital gains of $250,000 or more.  

Capital gains tax does not apply to your primary residence, so these changes could affect you if:

• You sell a secondary property – such as a cottage, rental or investment property – and earn more than $250,000 in profit from that sale.

• You sell investments for a value of $250,000 more than the original purchase price.

When will the changes take effect?

If adopted, the changes will take effect on June 25, 2024.

The federal government estimates that 28.5 million Canadians will not have any capital gains income next year, while three million others will fall below the $250,000 annual threshold, suggesting that these changes will not have an impact on the majority of Canadians.

If you believe they will affect you and your finances, it may be worth speaking with a qualified tax advisor and financial planner to learn strategies to reduce the impact of capital gains taxes and the proposed increased inclusion rate.

Author: KERRY GOLD

VANCOUVER

SPECIAL TO THE GLOBE AND MAIL

PUBLISHED APRIL 12, 2024

UPDATED APRIL 24, 2024

It was a Tax Court of Canada case last year that went mostly under the radar by all except for the legal community who were taken aback by its implications for renters.

A Montreal tenant was audited and ordered to pay the tax he had failed to withhold on the monthly rent to his non-resident landlord, as required by law. As a result, he was ordered to pay six years’ worth of tax as well as the compounded interest and penalties. The Canada Revenue Agency (CRA) could not collect against his overseas landlord, so the Canadian tenant was on the hook.

Last year, the tenant took the Minister of National Revenue to court, arguing that he did not know his landlord was a non-resident. The tenant, whose Italy-based landlord owned a single unit in a Montreal building, lost the Tax Court appeal on the grounds that they were a Canadian resident paying rent to a non-resident landlord, and were therefore required to withhold and remit 25 percent of the rent to the CRA. The judge acknowledged “the harsh consequences,” in her decision, but still held the “resident payer,” or renter, liable.

The problem with the law is that residential rent is treated the same as a royalties or similar payments, said Montreal-based tax lawyer Eric Luu, who defended the tenant in the case. In other words, residential tenants are held to the same standard as “a sophisticated business,” he said.

Not knowing a landlord is a non-resident is not considered a valid excuse.

“It is concerning,” said Mr. Luu. “But it’s very hard to go after the non-resident, so they put the burden on the tenant. If you take a step back, set aside the way the Income Tax Act is drafted, and just look at the policy of it, in these situations, you have to ask yourself who has the leverage? Obviously, the tenant does not have the leverage.

“The Department of Finance could come up with ways to ensure that non-resident landlords pay their taxes without defaulting to putting the burden on tenants,” said Mr. Luu.

It’s well known that non-resident owners have long had to pay withholding taxes on properties they either sell or rent out. However, few renters and few in the real estate business are aware that if those taxes don’t get paid, the tenant could be on the hook, said long-time realtor Lorne Goldman. Mr. Goldman sells properties to non-residents, and said realtors – and all renters and all small mom-and-pop landlords – should be formally educated on the risks to tenants.

“I’m in the real estate business, and I don’t even know about it,” said Mr. Goldman. “In my opinion, 99.99 percent of all tenants in Canada are unaware of this, and it is the responsibility of the CRA to inform the renting public that they could be on the hook for this withholding tax.”

In B.C., where one in 10 new condos are owned by a non-resident, what are the chances that some of those non-resident landlords are not filing their withholding taxes?, he asked.

Non-resident landlord Chris Oliver, who owns three rental units in Vancouver and lives in Hong Kong, said he didn’t know about the withholding tax, but his property manager has it covered. Licensed property managers are responsible for collecting the taxes, which takes the burden off the tenant, assuming they pay through a property manager.

“It sounds unfair for the tenants to be expected to handle this accounting rule,” said Mr. Oliver. “Can you imagine all the stress they are facing with having to hustle to pay their rents and the rising cost of living, and then to discover that there’s a whole complicated payments rule they are expected to manage?”

Ron Usher, long-time lawyer and general counsel for The Society of Notaries Public and visiting professor at Simon Fraser University, said he was taken aback by the Quebec case when he learned about it last year. He wonders how many non-resident landlords are not paying the tax.

“How many tens of thousands of situations are there where this isn’t being done? The exposure to tenants is enormous. … I think the story at this point is that it’s weird, it’s amazing, and it appears to be the law.”

He added that “it’s breathtakingly difficult” to figure out if someone is a resident or non-resident.

“We’re talking about tax residency, not physical residency. They could be in San Diego, but they really are a tax resident, so there’s this complication.”

Lawyer Michael Drouillard is vice chair of Landlord BC and a specialist in tenancy law. Mr. Drouillard said he knew about the potential for tenant liability long ago when he was a property manager, but he was still surprised to see a tenant held liable.

“I’m surprised to see that they actually did this in the context of a residential tenancy,” he said.

“I just don’t think it’s very nice for CRA to pursue a residential tenant who has no idea. You’re not told at any time that you have this lingering liability, and [are held to] this high degree of diligence.

“How can you expect that of a residential tenant?” he asked. “They have enough things to figure out. They don’t need some potential massive tax liability that they weren’t even aware of.”

The government considers a person a non-resident if they reside in Canada less than 183 days out of the year, or does not “ordinarily” reside in Canada. Generally, non-residents are subject to tax on income earned in Canada, including rental income. On the Government of Canada website, it states: “To make sure the correct amount is deducted, it’s important to tell Canadian payers [such as renters] that you’re a non-resident for income tax purposes.”

Tenant Mariana Makulkina, who found her apartment on Facebook Marketplace, says she only learned that her landlord lived overseas when she did her own research. She has a property manager, but without that third-party protection, she wouldn’t have known to ask her landlord when she signed the lease. Also, what landlord wants to be asked if they are paying taxes in Canada?

“It was never brought to my attention, and I could almost guarantee that nobody would know about that,” said Ms. Makulkina.

Property manager Donald Mackenzie, of Bodewell Rental Property Management, said his company routinely files remittances for their non-resident landlords, which make up about 10 to 15 percent of his clients. However, he has had the occasional non-resident say that they did not want to pay the tax.

“And then I say, ‘I don’t want to work with you.’ It’s that simple. But most owners will say, ‘make sure we are compliant.’”

However, Mr. Drouillard wonders why there isn’t more upfront clarity for tenants, who are often desperate to find an affordable apartment and who might not have a clue that their landlord is living outside Canada.

To protect themselves, tenants could start asking for statutory declarations from their landlords, attesting to their tax residency status, said Mr. Drouillard. But the landlord could move out of the country and their status changes, and the tenant doesn’t know.

B.C.’s residential tenancy agreement forms do not ask landlords to provide proof of their residency status. But when a homeowner sells a property, they must state their tax residency. That’s intended to protect the buyer from liability in case there are outstanding taxes owed. Tenants should have that same protection.

“In the context of a housing crisis, making them also investigate the residency status of their landlords?,” said Mr. Drouillard. “I’m not saying that that’s not the law, and the tenant has to be careful of that. The question is, is this the right thing for the CRA as a matter of policy to be doing?”

The CRA did not respond to requests to comment.