How much is capital gains tax in Canada?—and other questions answered

If you are going to sell next year, it is worth paying $833 of tax a year earlier? Think of it like debt. Imagine you can buy a refrigerator and you can pay $2,500 today or you can pay $3,333 in a year. Paying in a year costs you 33.33% more. That is a pretty high financing charge. 

What about paying that $3,333 in five years? That would be like paying 5.9% interest. Not bad, right? But, because you are paying the so-called “interest” with after-tax dollars, I would say you want a lower interest rate than 5.9% to make it worth it. In other words, if your investments are only earning 5% to 6% per year pre-tax (less after tax), it may not be worth it to effectively pay 5.9% more annually. 

For most investors earning a reasonable, mid-single-digit return, you might need to hold an asset for closer to 10 years to end up coming out ahead. 

I am not suggesting you sell everything you expect to sell in the next 10 years before June 25. The budget proposals could be changed before enacted. A new government could change the rules again. You may have personal circumstances that make things different for you. 

The point here is that if someone is very likely to sell an asset in the next few years that will be subject to the higher inclusion rate, there may be an advantage to doing so before June 25. And, that would generally apply to corporations. For individuals, only assets that would lead to more than $250,000 of tax in a single year.

Can you split capital gains between spouses in Canada?

When you die, you have a deemed disposition of assets. That would include a cottage. Although a cottage can qualify for the principal residence exemption, I will assume, Ian, you have a home where you live for which you would instead claim this exemption. 

You can leave a cottage to your spouse and have it pass to them at its adjusted cost base without triggering tax. But you have the option of having the transfer value at any price between the cost base and the fair market value. If anyone other than your spouse inherits, there is capital gains tax payable. 

This creates an interesting situation with these new changes. If a taxpayer dies and leaves a cottage to their spouse with a capital gain of more than $250,000, there may be situations where you want to declare a partial capital gain on the first death. If the surviving spouse is older, this may be more worth considering. If they are younger, it can be a tougher decision to make to prepay tax that could otherwise be paid many years in the future.