The federal budget announcement to increase the capital gains inclusion rate to two-thirds from one-half — effective June 25, 2024 — will affect many high-net-worth individuals and families, who will want to decide what actions (if any) they should take before that date.
While individual taxpayers will continue to be taxed on one-half of their first $250,000 of capital gains in a given year under these changes, they’re then subject to the new higher inclusion rate for capital gains above this threshold, which would be two-thirds of those capital gains. The higher inclusion rate of two-thirds also applies to corporations and trusts, but they’re not eligible for the current one-half inclusion rate on the first $250,000 of capital gains.
Although some groups had urged the federal government to delay the effective date to Jan. 1, 2025, to allow investors and business owners to make more informed choices, the federal government is pressing ahead with the June 25 deadline without delay.
Finance Minister Chrystia Freeland tabled a Notice of Ways and Means Motion in the House of Commons, providing more legislative details of the change, which the government expects to raise billions in revenue for the federal government. The motion passed in the House of Commons on June 11, 2024, with updated draft legislation expected later this summer.
That means, for HNW individuals and business owners, although there’s still some uncertainty, the details released by the government are not significantly different from what was initially announced in the budget. The Department of Finance has indicated that it will introduce some further technical changes, but nothing that will be a material change to the basic design of the new rules.
Finance has now clarified a number of specific details, including the following:
- It does not intend to introduce a tax election to allow those affected to recognize a gain without actually disposing of the property.
- The transaction has to close before June 25, meaning there is no “grandfathering” for transactions entered into before June 25 but that don’t close until after this date.
- Individuals will not be able to share their $250,000 threshold with corporations they own.
- Specific assets or corporations will not be exempted from the two-thirds inclusion rate.
- The new rules will not include special provisions based on how long an asset has been held.
For example, if you’re planning to sell a capital property later this year and that property has appreciated significantly in value — and there is no downside to moving forward immediately — it might make sense to consider accelerating the sale if possible.
But it’s also important to weigh any non-tax considerations, such as potential lost income from the property (e.g., dividends or rent), the potential for future growth in the value of the property and transaction costs on a sale of the property.
In the majority of cases, there will no longer be enough time to complete a sale to a third-party before the effective date. However, you may also consider whether you can crystallize the accrued gain at the lower inclusion rate by selling the capital property to a related person before June 25. Before doing so, you should determine whether you are comfortable giving up ownership of your property to a related person and evaluate other costs (e.g., land transfer tax and income tax on any recaptured capital cost allowance for dispositions of real estate) associated with such a sale. It is also important to note that you may have to prepay income tax if you choose to go forward with this planning to accelerate the realization of the capital gain.
If you decide to realize the capital gain, you may also have to pay alternative minimum tax if you realize the capital gain personally, which you may or may not be able to recover in the future.
Overall, given this significant change to the taxation of capital gains, you should be prepared to pay a higher tax bill on future capital gains, including potentially on death. This may affect your estate planning as well.
Canadian Entrepreneur’s Incentive
Finally, in a move to support entrepreneurial risk-taking and help lessen the burden when exiting a business, the budget also introduced a Canadian Entrepreneurs’ Incentive.
The government has indicated that it will release implementation details for this incentive in July.
In addition, the Lifetime Capital Gains Exemption (LCGE) will be increased to $1.25 million from the current $1,016,836.
Combined, these measures may provide entrepreneurs exiting their businesses with an exemption of at least $1.25 million and a reduced inclusion rate of one-third on a further $2 million, once the Canadian Entrepreneurs’ Incentive is fully phased in.
Whatever your circumstances, it’s worth talking to a tax professional about your situation, if you haven’t already, about the merits of possible strategies.
Dino Infanti is Partner, National Leader, Private Enterprise Tax, for KPMG Canada.
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