Capital Gains Changes
The federal government has announced proposed changes to capital gains tax rules, citing concerns that wealthier Canadians tend to derive a larger portion of their income from capital gains, so tend to disproportionately benefit from the capital gains tax advantage. In 2021, the top 1% earned 10.4% of all income in Canada, but this figure rose to 13.4% when factoring in capital gains. This trend is particularly significant when considering younger Canadians, as only about 5% of Canadians under 30 reported any capital gains in 2021. It proposes in Budget 2024 to amend the Income Tax Act, effective June 25, 2024, by increasing the inclusion rate on capital gains realized annually above $250,000 by individuals and on all capital gains realized by corporations and trusts from one-half to two-thirds. Capital gains for individuals up to $250,000 will remain unchanged at one-half. Business owners can access this exemption as individuals. Only 0.13% of Canadians with an average income of $1.4 million are expected to pay more personal income tax as a result of this change.The exemption for capital gains from the sale of a principal residence will continue. The lifetime capital gains exemption, which currently allows tax-free exemption up to $1,016,836 on the sale of small business shares and farming and fishing property, will be raised to $1.25 million as of June 25, 2024. This amount will be indexed to inflation in future. As of January 1, 2023, capital gains from property flipping, or residences being sold within a year, are being treated as business income, with certain exceptions.To ensure entrepreneurship is not discouraged, the government is also proposing the Canadian Entrepreneurs’ Incentive, which will reduce the inclusion rate to 33.3% on a lifetime maximum of $2 million in eligible capital gains. Combined with the lifetime capital gains exemption, this makes a total of at least $3.25 million if an entrepreneur sells all or part of a business. For some real estate investors, this could prove a valuable exemption.However, for some individuals with second properties, including cottages, this may pose a concern. Investors need to be aware of the impacts that triggering this higher inclusion rate may have on the potential profitability of an investment. In the short term, however, this may potentially create greater opportunities for buyers, as many individuals may choose to sell quickly before the change takes place, to avoid the extra tax.
Become your own financial superhero & build a healthier relationship with money: 8 steps to budgeting for realtors
If I asked you how you feel about your personal finances, would you respond empowered, excited and confident? If so, congratulations! You can skip the rest of this article. However, if you don’t feel this way but want to, please read on. As a financial educator with 15 years of experience, I want everyone to have healthy financial habits that enable them to live their life on their terms. I understand the unique challenges and uncertainty that real estate professionals, in particular, face due to the irregular nature of their income. Real estate is a dynamic industry characterized by unpredictable cash flows. But this is not an insurmountable challenge. It’s certainly nothing to avoid or ignore and is actually quite easily defeated. All you need is a budget. Initial feelings of resistance turned to confidence & empowerment While budgeting may initially bring feelings of resistance, its superpower is that it actually breeds confidence and empowerment — just like Clark Kent’s glasses hide the power that lies in Superman. I’ve personally experienced it and have seen it in my friends, family and clients. You don’t have to take my word for it though. The Financial Consumer Agency of Canada agrees. According to a study on the long-term effects of budgeting, “When individuals adopt the use of a budget, they grow their confidence when they achieve better outcomes such as keeping up with their financial commitments and limiting their spending. This results in a positive feedback loop whereby individuals grow their confidence through their behaviours, which in turn strengthens these behaviours.” How to create a budget If you still feel like you’re all alone next to your personal kryptonite, you’re not. You’re not alone and there’s no kryptonite in sight, just an annoying rock that you will soon blast away. Get ready to put on your cape. 1. Calculate your average income Review your income over the past several months, or even a year, to determine your average monthly income. This will give you a baseline. 2. Identify essential expenses List your fixed expenses such as rent or mortgage, utilities, groceries, transportation and debt payments. These get paid every month before anything else. Think Superman jumping in front of Lois Lane to protect her. 3. Address discretionary expenses Allocate a portion of your budget for variable expenses such as entertainment, dining out, clothing and other non-essentials. Be realistic about how much you typically spend in these categories. Clark Kent splurged on those fancy glasses because it gave him more freedom in his day-to-day life. 4. Build a buffer Create a “peaks and valleys” savings account to store extra savings in high-income months and to draw on in low-income months, which allows you to maintain a more consistent monthly budget. This should be separate from your emergency fund, which should be enough to cover at least three to six months’ worth of essential expenses. 5. Prioritize your spending Create a prioritized spend list so that when you have a windfall or higher-than-average income month, you already know where you want that money to go and are more likely to avoid impulse spending. Your prioritized spend list should include your “peaks and valleys” account, paying down debt and funding goals such as retirement, kids’ education or a dream vacation. When you’re ready to leap buildings in a single bound, you already know which one you’re conquering first. 6. Track your income and expenses Track your income and expenses at least monthly. I recommend weekly for the first month. This will help you stay on top of your budget and make adjustments as needed. Keep an eye out for danger (aka overspending) and head it off. Danger can’t stand up to Superman. 7. Adjust as necessary Be prepared to adjust your budget as you become more aware of your spending, if you decide to prioritize other spending areas and as your income changes. Making adjustments is not an indicator of a problem. On the contrary, it shows that you’re taking control of your financial future. 8. Budget loudly Let friends and family know you’re choosing different financial priorities. Find people who will support and encourage you. Enlist a colleague to hold you accountable or, even better, to join you in mastering the habit of budgeting. It takes the average person 67 days to create a new habit. Don’t expect your spending to perfectly align with your budget the first month. It won’t be perfect, but it will be progress. Celebrate your successes and keep going. To help you get started, I’ve created free resources you can access (below). Put on that cape. Strike the power pose. You’re ready to fly.
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