Government confirms changes to capital gains inclusion rate

2024 transitional rules

• The annual $250,000 threshold for individuals would be fully available in 2024 (i.e., it would not be prorated) and will apply only in respect of net capital gains realized on or after June 25, 2024.

Corporations and trusts

The new inclusion rate will apply to all gains realized in a corporation or by a trust on or after June 25, 2024. Gains taxed in most trusts will be subject to the new inclusion rate. Gains realized in a trust but allocated to beneficiaries who are Canadian resident individuals can be included in those individuals’ $250,000 annual threshold of lower-inclusion rate gains.

Trusts, mutual funds, and partnerships

The proposed legislation clarifies that trusts that allocate income to beneficiaries, mutual funds, and partnerships will need to provide an allocation to beneficiaries or partners of capital gains realized prior to June 25, 2024, and capital gains realized after June 24, 2024.

What does this mean to you?

Since the announcement of the capital gains inclusion rate increase in the Budget on April 16, there has been considerable uncertainty about the details of the proposals as the announcement was made without any accompanying draft legislation.

The announcement on June 10 confirms the government’s intention to increase the inclusion rate effective for capital gains realized on or after June 25, 2024. Any planning to accelerate the realization of capital gains prior to June 25 will need to consider other factors that are dependent on the specific details of your situation, as well as the uncertainty of possible changes to the legislation before it is passed.

While not a comprehensive list, some of the more common considerations are listed here:

• When would you otherwise be planning to dispose of a capital asset that currently has an accrued, unrealized capital gain? This is the most important of the considerations. While there will be an increase in inclusion rate for dispositions on or after June 25, accelerating the realization of the gain will mean pre-paying tax. This means that the time value of the funds lost to tax must be considered. At top personal tax rates, the difference in taxable income of about 17% (66.67 % - 50%) results in an increased tax in the range of 7.4% – 9.1% when measured against the total gain (rates vary by province). For example, if there is a significant accrued gain on a family cottage that will be subject to tax on the parent’s death—which is estimated to be 20 years from now—is the tax savings worth pre-paying the tax? Compare this to a gain likely to happen within the next six months. The opportunity cost of paying tax now will be quite different in these two situations.
• Alternative Minimum Tax (AMT) may be triggered by realizing substantial capital gains in one year. Capital gains realized before June 25 will be taxed at a rate of approximately 31% under proposed AMT changes, compared to approximately 25% of the total gain for regular tax on pre-June 25 capital gains. Whether AMT will be payable depends on the mix of income earned or realized. Extremely large gains compared to other sources of income can mean that the AMT is a permanent cost if it cannot be recovered before the end of the carry-forward period of seven years.
• There are transactions cost to be considered if steps are taken now to crystallize an accrued capital gain, such as land transfer tax, professional fees, and commission costs. These are additional costs that are also being incurred now to save taxes at some time in the future.
• What is a reasonable discount rate to be used to measure the present value of future taxes?
• What is your tax rate going to be when the gain is realized as perhaps the gain will be taxed in a lower tax bracket if you are planning to wait until after retirement to realize a gain?
• Not all properties will result in a capital gain when the property is disposed of. In some situations, instead of a capital gain, the gain will be treated as business income such as if the gain arises because of an adventure in the nature of trade or is deemed to be on income account such as under the residential property flipping rules.

Employees with vested stock options will also need to decide whether it is worthwhile to exercise these options prior to June 25, 2024, to be able to have a higher stock option deduction. You will need to keep in mind the considerations noted above, and that the annual $250,000 allowance can be used where total capital gains and stock option benefits are less than $250,000 in the year.