Upcoming changes to the capital gains inclusion rate: Planning opportunities to reduce the impact of the new rules

( Disponible en anglais seulement )

1 mai 2024 | William J. Fowlis, KC, FCPA, FCA, TEP, Andrew C. Bateman

Since 2000, the capital gains inclusion rate under the Income Tax Act (the “Tax Act”) has been one-half of the applicable capital gain.  As a consequence, capital gains during this period of time have generally been subject to tax at 50% of the tax rate applicable to regular income.

The 2024 Federal Budget introduced a major legislative change to increase the capital gains inclusion rate:

  • from one-half to two-thirds for capital gains realized by corporations and trusts on or after June 25, 2024; and
  • from one-half to two-thirds for the portion of capital gains realized by individuals on or after June 25, 2024 in excess of an annual $250,000 threshold. Capital gains below the threshold would continue to benefit from the one-half inclusion rate.

In effect, this change results in a one-third increase in the tax rate for capital gains that are subject to the new inclusion rate.

Interestingly, the proposed changes did not become immediately effective as of the budget date (April 16, 2024), but rather are delayed for ten weeks until June 25, 2024. This delay in the effective date provides opportunities for taxpayers to adopt planning measures. In particular, a taxpayer may wish to voluntarily trigger current accrued but unrealized capital gains prior to June 25, 2024 so that such accrued capital gain will not ultimately be subject to the two-thirds inclusion rate.

As noted, the proposed new rules provide for a capital gains inclusion rate of two-thirds for all capital gains realized by a corporation but proposes to retain the one-half inclusion rate for individuals on the first $250,000 of annual capital gains realized by an individual. This results in a significant adverse change to the fundamental principle of integration in the Tax Act, being the principle that a taxpayer generally should be indifferent as to whether income is earned or capital gains realized indirectly through a corporation or directly by an individual. That is, about the same amount of income taxes should be payable in either situation. The proposed new changes, depending on the draft legislation yet to be introduced, have the potential to result in a materially higher effective capital gains tax rate for corporations rather than individuals, particularly with respect to the first $250,000 of annual capital gains realized. As a result, planning with respect to accrued capital gains within a corporation in order to reduce the impact of these changes potentially is of more significance.

While the pros and cons of accelerating the realization of capital gains and other relevant tax rules would need to be taken into account, planning for all taxpayers (including corporations, partnerships, trusts and individuals) to accelerate the realization of capital gains before June 25, 2024 may be appropriate in the following situations, among others:

  • Investments: Taxpayers that own investment assets that are capital property with accrued but unrealized capital gains.
  • Real property: Taxpayers that own real estate that is capital property (other than a principal residence) with accrued but unrealized capital gains.
  • Shares of an operating business corporation: Taxpayers that own shares of a corporation that carries on a business which have appreciated in value where a sale of those shares in the future is a likely scenario.
  • Business Assets: Corporations that carry on a business which has unrealized gains on assets of the business (such as goodwill or capital assets used in the business) where an asset sale in the future is a likely sale scenario.
  • Holding Corporations: Individuals who own shares in private corporations that have appreciated in value, particularly where the corporation itself owns assets with accrued but unrealized capital gains.
  • Past estate freezes: Taxpayers who hold preferred shares in a corporation that have been issued as part of an estate freeze relating to that corporation.
  • Prospective estate planning: Individuals contemplating or undertaking estate planning with a view of minimizing the taxable capital gains realized upon their death.
  • Pending trust 21-year deemed dispositions: Circumstances where a trust is expected to retain property and pay tax in respect of a pending 21-year deemed disposition.
  • Future emigration: Taxpayers considering an emigration from Canada which would result in a deemed disposition of their assets.

We would be pleased to assist you in assessing how these proposals might affect you, your corporation, trust, and partnership, as applicable and to advise with respect to planning opportunities available in order to reduce the impact of these new rules. It is noted that any transactions to reduce the impact of the higher inclusion rate must be completed prior to June 25, 2024.

Please reach out to a member of Miller Thomson’s Corporate Tax if you have any questions.

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