After many years of threats, the April 16, 2024 Federal Canada Budget (“Budget”) includes a proposal to increase the capital gains tax inclusion rate for individuals, trusts, and corporations. The Budget did not set out any legislative specifics and it is anticipated that the new capital gains tax legislation will be separate from the main Budget legislation. Consequently, and in keeping with previous announcements of this current government, there continues to be uncertainty and angst with respect to the specifics of the proposed tax increase.
At present, one-half of capital gains are included in computing a taxpayer’s income under the Income Tax Act. As such, this treatment results in capital gains being effectively taxed at one-half the rate of ordinary income. The previous policy of various governments has been to encourage investment and capital risk taking. However, this Budget proposes to increase the inclusion rate from one-half to two-thirds for corporations and trusts and, in the case of individuals, on the portion of capital gains realized in a year that exceeds $250,000. These changes are anticipated to be effective June 25, 2024.
The higher capital gains inclusion rate will result in increased taxes on the sale of investments and other capital property. For example, an individual subject to the top marginal tax rate can anticipate an approximate 8% - 9% increase in taxes on capital gains in excess of $250,000 realized on or after June 25, 2024. For corporations and trusts, a similar tax rate increase will be applied on every dollar of capital gains – from $0+. This new proposal will likely destroy the tax utility of holding investments in trusts and corporations and ignore the previous policy of tax integration between personal and corporate rates of taxation. This is likely the policy objective of the legislation.
Taxpayers are now required to track capital gains and losses realized before June 25, 2024 and capital gains and losses realized on or after June 25, 2024. The $250,000 threshold for individuals will likely not be pro-rated for 2024, such that the $250,000 limit will apply only to gains realized after June 25, 2024.
Claimants of the employee stock option deduction would be provided a one-third deduction of the taxable benefit to reflect the new capital gains inclusion rate, but would be entitled to a deduction of one half the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains. Options held by non-personal entities such as trusts and corporations will be hit with the full inclusion rate.
In some cases, consideration should be given to realizing capital gains before June 25, 2024. However, taxpayers should recognize that there may be other tax consequences that could outweigh this tax benefit, such as the loss of tax deferral on unrealized gains and the fact that the government proposes to increase in the lifetime capital gains exemption to $1,250,000 (up from $1,016,836) effective June 25, 2024 on the sale of shares of a qualified small business corporation or qualified farm and fishing property.
Moreover, it should be borne in mind, that this government’s pattern of behaviour, at times, has seen a tax policy announced, then a further announcement of implementation delay – often given just before the aforementioned policy was to take effect.
If you own a Canadian controlled private corporation, either as an active business or holding company, or are a trustee of a Canadian resident trust, you may wish to speak with your legal, financial and accountancy advisor.