Update and answers about the capital gains inclusion rate increase

In the 2024 federal budget, release on April 16, 2024, the Liberal government, led by Finance Minister Chrystia Freeland, announced that they intended to increase the capital gains inclusion rate from 50% to 67% effective for capital gains realized on or after June 25, 2024.

To review the details of this announcement and how they impact you and your business, please read our blog here 2024 Capital Gains inclusion rate increase (achenhenderson.ca), or listen to our podcast here 2024 Capital Gains Inclusion Rate Increase (achenhenderson.ca).

On June 10, 2024, just 2 short weeks before the changes are set to take effect, the Liberal government tabled it’s Notice of Ways and Means Motion in the House of Commons, which was adopted with the support of the NDP coalition. The announcement included a couple backgrounders, as well as 59 pages of draft legislation that will be updated over the summer. According to the June 10, 2024 NWMM, the capital gains inclusion rate increase is set to take effect as planned, with a couple clarifications provided.

Government of Canada delivering tax fairness for every generation – Canada.ca (please excuse the misleading title of this news release).

Fair and Predictable Capital Gains Taxation – Canada.ca (please excuse the misleading title of this backgrounder).

Capital Gains Inclusion Rate – Canada.ca (this one is the only appropriate title of the three).

What questions do we now have answers to?

• There will be no change to the principal residence exemption. Capital gains on the sale of principal residences will continue to be exempt from capital gains tax.
• There will be no election to trigger capital gains before June 25, 2024; meaning that taxpayer will have to affect a legal disposition of their capital property to trigger capital gains. This will be very problematic (and extremely expensive) for folks with real estate holdings who now have less than 2 weeks to figure out how to sell their real estate (to a holding company, family member, or otherwise).
• The $250,000 / individual / year exemption from the new, increased, capital gains inclusion rate will only be available to individuals and cannot be shared with their small business corporations.
• All corporations, including small business corporations, will incur the increase capital gains inclusion rate on the first dollar of capital gains earned, breaking integration, and unfairly targeting entrepreneurs and investors.
• No carrying, forward or back, unused portions of the $250,000 exemption not used in a particular year.
• All trusts, except GREs and QDTs (below), are subject to the new capital gains inclusion rate on the first dollar of capital gain.
• The $250,000 exemption will not be prorated in 2024, however will be fully available to individuals who realize gains between June 25, 2024, and December 31, 2024.
• Unlike all other types of trusts, Graduated rate estates and Qualified Disability trusts will be entitled to the $250,000 / year exemption from the new capital gains inclusion rate.
• Trusts will now have the ability to designate capital gains allocated to beneficiaries as ‘pre’ June 25, 2024, capital gains OR post-June 24, 2024, capital gains. In their 2024 returns, taxpayers will be expected to clearly identify which capital gains occurred before and after June 25, 2024. This will increase the effort, and thus the cost, of compliance for 2024.
• Personal, Corporate, and Trust income tax returns for 2024 will have an updated capital gains reporting schedule to be able to identify which gains occurred before June 25, and which occurred on or after June 25.
• There will be no grandfathering for any types of assets, or unrealized capital gains on those assets, held or earned prior to June 25, 2024.
• Reserves claimed on capital gains earned in a previous year, but brought into income over several years, will continue to be taxed as if they were brought into income on January 1^st of that year, at that year’s applicable capital gains inclusion rate. There is not relief for sales that closed before June 25, 2024.
• Allowable Business Investment Losses (ABILS) will be claimed at the increase capital gains inclusion rate for such losses incurred on or after June 25, 2024.
• Net capital losses carried forward will continue to be adjusted to the capital gains inclusion rate in effect at the time of claiming them. If a capital loss were incurred in 2023 of $100 (a net capital loss of $50), if could be used to fully offset a capital gain realized in 2025 of $100 (a net capital gain of $67).

Would you like more information about how the new capital gains inclusion rate impacts your business, please reach out – we would love to chat.