Federal Increase in Capital Gains Tax: How Might This Affect My Divorce?

1. Federal Increase in Capital Gains Tax: How Might This Affect My Divorce? Recently, the Trudeau government has increased capital gains tax, claiming that only a minimal number of Canadians will be affected. This policy change particularly affects Canadians who contribute the most to the economy and pay the most taxes. Finance Minister Chrystia Freeland announced that Canadian companies and individuals will be taxed 66.67% on their capital gains, an increase from the pre-existing 50%. As of June 25, 2024, those affected by the increase in capital gains tax includes corporations, trusts and individuals who realize a capital gain that exceeds $250,000. What are capital gains?

2. Capital gains can be acquired when you sell, or are considered to have sold, a capital property for more than the total cost at which it was purchased, and in consideration of the expenses incurred to sell the property. For example, if a cottage was purchased in 2020 for $100,000 and sold in 2023 for $300,000, the seller would have realized a capital gain of $200,000, a portion of which is taxable. Capital property includes depreciable and any property which when sold, incurs a capital gain or a capital loss. However, the purpose of selling capital property is to realize a profitable investment. How are capital gains calculated? In Canada, capital gains are considered taxable income that must be reported on your income tax and benefit returns. As it was, only 50% of the capital gain was taxable. As of June 2024, two-thirds of capital gain will be taxable. For all corporations and trusts, the capital gains tax inclusion rate will increase to 66.67%. For individuals with capital gains over $250,000, the capital gains tax inclusion rate will increase up to 66.67%. Those with gains under $250,000, will not be affected by the increase; the rate will remain 50%. The amount of income tax paid each year also will depend on your tax bracket and its marginal tax rate. Here is an example: ●Let’s say your annual income for the year 2024, is $260,000. ● The sale of your cottage results in a $100,000 profit. ● 67% of the profit is taxable. ● Therefore, you add $66,670 to your income for that tax year. ● $260,000 + $66,670 = a total income of $326,670 for the 2024 tax year. How will the changes affect my divorce? When it comes to the division of assets in a divorce, it is important to be informed about applicable capital gains tax. As we know, property used as a family residence is exempt from taxable capital gains meaning you are not required to pay tax on the profits realized in the event of the sale of the family residence. However, if part of the family residence is used to produce income, that portion will be affected by taxable capital gains once sold. If the spouses acquire immovable properties during the marriage for the purposes of rental income, there will be taxable capital gains that apply if they are to be sold. In the event of a divorce, if the immovables are sold to third parties or even to the spouse (known as a “buy-out”), taxable capital gains would also apply.

3. For instance, in the decision Droit de la famille – 221322, the Superior Court of Quebec granted a spouse the right to be reimbursed half of the capital gains tax realized on the sale of the spouses’ Airbnb rental property during their divorce. The net value of partnership of acquests subject to partition must have regard to the capital gain income tax liability which arose from the disposition of the Airbnb rental property and was paid by one of the spouses. As mentioned above, 50% (now 66.67%) of the proceeds of the sale of the immovable generated a capital gain income tax. The Court ordered the non- paying spouse to assume their share. What can I do? It is always best to consult a divorce lawyer and/or tax specialist should you have any questions about how the capital gains increase will affect the division of assets within a divorce or a rupture of a civil union. Please feel free to contact us to schedule a consultation with one of our specialized family law attorneys. Source URL: https://www.spuntcarin.com/federal-increase-in-capital-gains-tax-how- might-this-affect-my-divorce/