The federal government has announced more details on changes to the capital gains inclusion rate.
This change, which was announced in the 2024 federal budget (Budget 2024), proposes to increase the capital gains inclusion rate for individuals, trusts, and corporations. Specifically, 66.7% of capital gains realized on or after June 25, 2024 would generally be included in income for tax purposes (this is up from 50%). To provide some relief for individual taxpayers, the budget proposed that capital gains up to $250,000 realized by an individual either directly or indirectly through a trust or partnership will remain subject to the 50% inclusion rate each year.
The government tabled a Notice of Ways and Means Motion (NWMM) to introduce legislation for the capital gains inclusion rate change on June 10, 2024, with additional technical amendments set to be released in July 2024. Notably, the NWMM proposes that graduated rate estates and qualified disability trusts will remain subject to the 50% inclusion rate on up to $250,000 in capital gains realized each year—the same as individuals.
If enacted, the new rules will be effective June 25, 2024.
This provides only a brief window for taxpayers to understand the potential impact and decide whether to take action.
Should I take action before June 25, 2024?
A higher capital gains inclusion rate means higher taxes on the sale of investments and other capital property. For example, an individual subject to the top marginal tax rate can anticipate about an 8% - 9% increase in taxes on capital gains in excess of $250,000, realized on or after June 25, 2024. For corporations and trusts (except for graduated rate estates and qualified disability trusts), the tax rate increase is immediate on the first dollar of gains.
Taxpayers should consider potential unforeseen tax consequences that could outweigh the tax benefit of realizing a gain before the inclusion rate increase. Considerations include:
- Large capital gains may result in alternative minimum tax for individuals and certain trusts.
- 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 rule, unless an exception is met.
- If you're selling shares of qualified small business corporation (QSBC) or qualified farm and fishing property (QFFP), the impact of the increase in the lifetime capital gains exemption to $1.25 million (from $1,016,836) effective June 25, 2024, proposed in Budget 2024.
- The proposed general anti-avoidance rule (GAAR) and penalty.
- Additional factors, such as current market prices and the loss of the tax-deferral on the unrealized gain.
If you, your business, or your trust holds assets with significant accrued gains, reach out to your tax advisor for assistance in analyzing your options. Similarly, if you’ve previously implemented an estate plan, you should also contact your advisor to reassess its effectiveness.
Our National Tax Leader, Tara Benham, elaborates on the above considerations and discusses various scenarios in this video. Watch here: Capital gains inclusion rate: Planning considerations | Grant Thornton |
Takeaway
It's important to reach out to your tax advisor promptly to assess how these proposals might affect you, your trust, or your corporation. There are many tax and non-tax factors to consider so a comprehensive cost-benefit analysis is advisable. If you choose to take action, it must be completed prior to June 25, 2024.
Contact your local advisor or reach out to us here.
Disclaimer
The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circ*mstances or needs and may require consideration of other factors not described herein.
