The New Capital Gains Tax Increase and Three Predictions for Toronto Real Estate

Every year around late April, the federal government tables its budget, and every year it tells us two things: what benefits we get, and how much of our income Ottawa plans to take back in tax. This year the budget landed with a ninth straight deficit, which nobody found surprising. Some analysts called it the worst budget in 40 years. Others said it was not that bad.

I am Moe Asgarian, Principal Real Estate Broker in Toronto and ranked number 47 in the world at RE/MAX. I want to skip past most of the budget and focus on the one piece that touches our housing market the hardest: the increase to the capital gains tax, or as we say in Farsi, the tax on your investment gain when you sell.

What actually changed

For the first time since 2001, Ottawa moved the inclusion rate on capital gains. The inclusion rate is the portion of your gain that counts as taxable income. It does not tax the whole profit. If you sell an investment property for $100,000 more than you paid, the government applies an inclusion rate to that gain and taxes only that slice. Before 2001, the rate was 75%. It was cut to 50%, and it sat there untouched for more than two decades. The 2024 budget raised it again.

Who gets hit by this

For individuals, meaning people who hold the property under their own name on title, gains up to $250,000 still use the old 50% rate. Nothing changes at that level. But once your net gain passes $250,000, the inclusion rate on the excess jumps to 66.67%. So if you clear $350,000 in net profit, that top slice is taxed at the higher rate. For corporations and trusts, there is no threshold at all. The inclusion rate is 66.67% from the first dollar. Remember, your primary residence stays fully exempt. This only bites on investment property. The change took effect June 25, 2024, and Ottawa expects it to bring in roughly $19 billion more over five years, money it says will fund a $19 billion housing plan.

Prediction one: a supply squeeze in resale

You might think $250,000 is a huge gain to shelter at 50%. It is not, for long-term investors. Someone who bought a rental 20 or 25 years ago and sat on it is clearing far more than $250,000. Picture a two-bedroom apartment bought in 2017 for $600,000, now renting for $3,200 a month. That owner has positive cash flow, a refinance option to pull equity out tax-free, and every reason to hold rather than sell into the new tax. More than half of investment properties were bought before 2017. Half the stock that could hit the market likely stays put. Less supply is a real problem for big cities like Toronto and Vancouver.

Prediction two: weaker demand for new construction

With interest rates already high, investors are cautious about new projects. A higher capital gains tax scares them further. A developer usually needs to sell around 70% of units to finance a build. If investors stay away, projects do not get funded, and they do not get built. You cannot lean on first-time buyers to fund a pre-construction tower. Those units need investors, and investors are exactly the group this change discourages. The worst outcome is a project that gets cancelled years in, the deposits returned, and the supply never delivered.

Prediction three: inflation and capital flight

About half of what we consume daily is imported. If investors decide to put their money in another country instead, the Canadian dollar weakens and the price of everything we buy climbs, from groceries to rent. The Bank of Canada has spent two years fighting inflation, and we are finally seeing rates near 3%. A tax change that pushes capital out of the country works against that progress. I hope all three of these predictions turn out wrong. If you want to talk through what this means for your own property, fill out the form below or book a free consultation with our team. Stay well and take care.