Canada Will Not Apply Capital Gains Tax to Primary Residences in New Budget

The federal government will not apply the controversial capital gains tax hike to primary residences, Ottawa announced on April 16 when unveiling the 2024 budget. For weeks, there had been speculation that Prime Minister Justin Trudeau and his Liberal government would introduce a levy on homeowners.

Ottawa released the $450.8 billion federal budget for 2024, which features a $40 billion deficit, billions of dollars in new spending, and programs to benefit younger and older Canadians, the disabled, and Indigenous communities.

One of the main facets of the tabled budget is the capital gains tax hike. Capital gains are the proceeds of a sale of an asset, such as a stock or business. The federal government projects that raising the inclusion rate from 50 per cent to 66 per cent on capital gains above $250,000 for individuals and all capital gains for corporations and trusts will generate more than $19 billion over four years.

The good news for millions of Canadians is that principal residences would not be subjected to a capital gains tax. This had been a considerable fear among market observers heading into the official budget announcement. So, in other words, if the home was your primary residence for every year you owned it, you would not have to endure a capital gains tax.

Instead, Canadians selling non-principal residences, such as cottages, vacation homes and rental properties, would be subjected to the inclusion rate.

Since January 2023, the federal government has treated capital gains from house flipping (defined as buying a property and selling it within one year) as business income.

Meanwhile, the budget for 2024 estimates that the higher rate would impact 0.13 per cent (410,000 individuals) of Canadians with average incomes of $1.42 million and nearly 13 per cent (307,000) of private companies.

The government says the goal would be to improve tax fairness and ensure Canadians maintain access to various social services, from health care to education.

“In order to build a fair economy, everyone needs to pay their fair share,” the Department of Finance Canada said. “The government is doing this so that young people can have the same opportunities as previous generations. Canada’s future success depends on their success. It is only fair that these important investments are funded by those who have benefited the most from all the opportunity that Canada has to offer.”

It should be noted that Canada did not have a capital gains tax until 1972.

What the Experts Say

Economists, industry professionals, and business experts have provided their opinions on the 2024 federal budget’s capital gains tax topic.

John Oakey, CPA Canada’s vice president of tax, warned that this could have far-reaching effects on individuals other than the affluent. Oakey noted that this budget “adds complexity into our income tax system” and argued that middle-class members selling their assets could be impacted.

In addition, speaking in an interview with BNN Bloomberg, Oakey asserted that non-wealthy Canadians could face this financial penalty when “one-time events occur.”

“So, if somebody passes away, that could be a one-time event where there’s enough capital gains collectively to push you above the $250,000 threshold,” Oakey said.

Others fear this could further exacerbate Canada’s productivity hurdles. The economy’s productivity has deteriorated for 13 consecutive quarters and has fallen to its lowest levels since 2016. In March, Bank of Canada deputy governor Carolyn Rogers spoke of a “productivity emergency” in the G7 country. One economist thinks the capital gains tax hike could worsen the situation.

“Canada’s productivity is in crisis, and the best way to get it back up is to attract new investments. And few are those who have been able to lure investments and job creators with promises of higher taxes,” said Renaud Brossard, Vice-President of Communications at the Montreal Economic Institute (MEI). “With this budget, the Trudeau government is shooting us in the foot.”

The Canadian Chamber of Commerce echoed these worries, explaining that the budget did not offer an outline of how Ottawa is promoting growth and productivity. “We oppose any measure which will increase the costs for businesses and Canadians when both are currently experiencing challenging economic headwinds,” said Jessica Brandon-Jepp, senior director of the Chamber’s fiscal and financial services policy.

Deborah Yedlin, president of the Calgary Chamber of Commerce, claimed that this will not advance capital formation and will be a “disincentive for individuals.” Overall, she believes the substantial increase in spending – $53 billion over five years – is worrisome.

“Several key measures announced in Budget 2024 are critical to address issues such as housing supply and affordability, the need to boost productivity, streamline the permitting process and advance economic reconciliation,” said Yedlin in a statement. “However, the significant increase in spending is cause for concern, as we see the debt servicing burden continue to grow significantly.”

Daniel Tisch, the president and CEO of the Ontario Chamber of Commerce, welcomed investments in artificial intelligence and housing. However, some measures, including the capital gains tax hike, will make it “harder” to attract private sector investments and enhance productivity growth.

“By making big-ticket investments while raising capital gains taxes, the budget takes two big steps forward, but also one step back,” he said.

Despite the flood of criticisms, Tyler Meredith, a former economic policy advisor to Prime Minister Trudeau and Finance Minister Freeland, says, “It’s fair.”

“You get [up] to lifetime capital gains exemption, an exclusion for innovation sectors, and it only applies on $250k above,” he wrote on X (formerly known as Twitter). “So… you’ll only pay 8 cents more on a $1 of cap gains (16% increase at a 50% top marginal rate) when you sell >$250k in stock.”

The capital gains tax increase is scheduled to go into effect on June 25.