Capital gains inclusion rate changes align with those proposed in Budget 2024
When the federal government this week tabled a notice of ways and means motion providing technical details of planned changes to the capital gains inclusion rate, the news was more about what wouldn’t be included in future legislation than what would. Despite feedback from a diverse group ranging from economists to organizations representing Canada’s physicians—that the rate hike would be detrimental to Canada’s economy, would discourage innovation and was being too hastily implemented—the government confirmed it would press ahead.
As outlined in our coverage of Budget 2024, the proposed legislation would see the capital gains inclusion rate increase to two-thirds from one half on annual capital gains in excess of $250,000 for individuals, and to two-thirds on all capital gains realized by corporations and trusts (without the $250,000 threshold). The changes would apply to capital gains realized on or after June 25th, 2024. Transactions in process before, but that close after June 25th, will be subject to the new rate.
Critics had argued for a delay in the implementation of the changes to allow taxpayers to plan and potentially execute transactions prior to the June deadline. The government declined to do so. Others called for a mechanism that would allow taxpayers to elect to pay capital gains prior to June 25th without disposing of (or gifting) assets such as a family cottage. Again, the government declined that recommended compromise.
Questions swirled around other technical details of the capital gains inclusion rate proposals. Several were confirmed in the ways and means motion:
- Corporations and trusts will not have access to the $250,000 capital gains threshold
- Individuals will not be able to share the $250,000 threshold with associated corporations in order to mitigate their tax liability
- Any asset that is subject to capital gains, no matter the period of time for which it’s owned, will be subject to the new rates. Some had called for assets such as long-held investment properties to receive special treatment under the new rules
- There will be no provision that allows capital gains to be averaged over several years in cases where an individual exceeds the $250,000 annual threshold
The minor concession is that Graduated Rate Estates and Qualified Disability Trusts will be eligible for the $250,000 capital gains threshold. Both class of trusts will be subject to progressive personal income tax rates. The ways and means motion also confirmed that in some cases, capital gains realized in a trust and a partnership prior to June 25th may be eligible for inclusion in an individual’s personal threshold amount of $250,000.
Budget 2024 proposed an increase to the lifetime capital gains exemption—to $1.25 million on capital gains, up from the $1,016,836 threshold for 2024—that would also take effect after June 25th, 2024. That proposal provides some relief to business owners, as does the new Canadian Entrepreneurs’ Incentive (CEI), which offers a lower tax rate on capital gains incurred when an eligible individual disposes of qualifying shares of a Canadian-controlled private corporation. But as we noted in our budget coverage, the rules to qualify for the CEI are relatively onerous and will deliver fewer financial benefits to entrepreneurs than advertised.
According to the Department of Finance, the updated draft legislation that includes these technical capital gains inclusion changes will be available in July, 2024—meaning that the new rates will come into effect before the final legislation is passed.
It would be fair to say that the federal government is raising revenue to pay for costly new programs at the expense of many middle-class Canadians and entrepreneurs. Despite arguments that the changes will impact only a tiny fraction of taxpayers in the next year, the Trudeau Liberals’ rosy projections neglect to include the many Canadians who will eventually sell properties such as cottages, or liquidate other assets, and will be subject to the new inclusion rate. Even with the $250,000 threshold, the financial impact on these individuals will be significant. Corporations and trusts will fare even worse.
As such, this is not a tax hike that will only affect the wealthy. And the haste with which it will be implemented essentially negates taxpayers’ ability to plan. Many Canadians, especially older professionals such as lawyers, doctors and business owners, will see their retirement nest eggs cracked as a result.
This week’s announcement was unfortunate and reflects a government hungry to fill its coffers yet unwilling to respond to the reasonable concerns of affected stakeholder groups. In short, the changes will proceed, so the best option now is to work with your Chartered Professional Accountant and/or financial planner to determine the most appropriate tax-planning strategies to help mitigate this enhanced liability. For certain assets, it may be time to take a wait-and-see approach rather than selling before June 25th. Capital gains inclusion rates have swung substantially over decades. They could dip again when future governments with different spending priorities take office.
Armando Iannuzzi, Co-Managing Partner
If you have questions about the new capital gains inclusion rates, contact a member of our team.
