Since October 17, 2000, only 50% of capital gains are included in income for tax purposes. However, in the recent 2024 Federal Budget, the government announced its intention to increase the capital gains inclusion rate from 50% to 66.7% (i.e. 2/3rd) on certain capital gains as of June 25, 2024. This can represent an increase in the tax rate on capital gains of around 9% at top marginal tax rates.
While individual taxpayers will continue to benefit from the 50% inclusion rate on the first $250,000 of capital gains realized annually, corporations and trusts will be subject to the 2/3 capital gains tax inclusion rate on all capital gains realized on or after June 25, 2024.
Since draft legislation implementing the proposed changes has not yet been released, many details regarding the proposed rules remain vague. However, it is clear that the proposed changes will have broad implications for many taxpayers requiring tax strategies to be revisited.
A short window has been provided until June 25, 2024 for taxpayers owning capital property with inherent gains to plan for the upcoming proposed rate change. In some situations it may be possible to accelerate sales, and/or undertake certain transactions to realize capital gains prior to June 25, 2024, thereby locking in the current 50% inclusion rate.
There are methods available that can be used to accelerate capital gains. In some situations, there may be the simple option to sell assets on the open market and realize proceeds of sale. This leaves the option to repurchase the asset at a higher cost base, effectively crystalizing the gain. In some situations where an open market disposition is impractical, more complex methods may be available to effectively crystalize gains prior to the rate changes.
However, it is important to carefully consider the facts of the particular situation before taking action to accelerate realizing gains motivated by the potential change. The following are some considerations that should be weighed with the potential benefit of the lower capital gains inclusion rate:
- Triggering capital gains prematurely results in accelerating the timing of the tax liability. Consideration should be given to the opportunity of lost returns on the prepayment of taxes.
- Where a gain has been triggered through a reorganization without sale proceeds being received, the taxes may need to be financed or a liquidity issue may arise.
- Triggering large capital gains may result in Alternative Minimum Tax (AMT) issues for individuals and certain trusts. This may be of particular concern considering recent changes to AMT that became effective January 1, 2023 as discussed in our previous article.
- Certain transactions involving real estate and/or other assets may be subject to GST/HST implications and/or land transfer taxes.
- Triggering capital gains in a corporation may impact on the small business deduction entitlement for an associated group of companies.
- Gains on a Canadian residential property, or rights to a pre-construction residential property) held for less than one year may be deemed to be business income (i.e. 100% taxable) under the residential property flipping rules discussed in our previous article.
- There is uncertainty with respect to timing of gains triggered in a partnership or Trust, as well as how the rules will apply to capital gains reserves taken.
- Complex transactions to realize gains may result in a challenge by CRA under the proposed General Anti-Avoidance Rules (GAAR). Although CRA has indicated that they would not apply the GAAR to legitimate planning aimed at triggering capital gains before June 25, 2024, this is CRA’s administrative policy and not necessarily supported by law.
We suggest contacting your Shimmerman Penn LLP advisor at your earliest convenience to discuss how the proposed changes may impact you, and whether any action is recommended prior to June 25, 2024.
