Navigating the 2024 Changes to Canada’s Capital Gains Inclusion Rate: What You Need to Know

Since the 2024 federal budget announcement and the increase in the capital gains inclusion rate became effective June 25, 2024, the increased tax rate has garnered significant public attention. 

If this impacted you, you must know what capital gains are and how the new federal budget impacts individuals and business owners moving forward.

A capital gain occurs when you sell an asset for more than its purchase price. Conversely, if you sell it for less, you incur a capital loss. Dispositions triggering capital gains or losses can be actual or deemed for income tax purposes. For instance, gifting an asset to someone is a deemed disposition, requiring you to report a capital gain or loss even if no actual proceeds are received.

When you report capital gains and losses on your income tax return, an inclusion rate is applied to determine the taxable amount (or allowable amount for capital losses). Your tax rate is then applied to your net taxable capital gains to calculate your tax liability.

Capital Gains Inclusion Rate

The government’s Budget 2024 increases the capital gains inclusion rate for corporations and trusts from 50% to 66.67% for dispositions occurring on or after June 25, 2024. For individuals, the rate will also rise to 66.67% for gains exceeding $250,000 annually.

• Individuals' Deduction: Individuals can still deduct 50% of the taxable benefit for up to $250,000 of combined employee stock options and capital gains. Gains above this threshold will only have a 33% deduction.
• Property Jointly Owned: Each individual in a joint ownership scenario will have their own $250,000 threshold.
• Special Trusts: Graduated rate estates and qualified disability trusts qualify for the $250,000 threshold if the gains are not allocated to a beneficiary within the year.
• Installment Payments: If the proceeds from a capital property disposition are payable over several years and the payments start before June 25, 2024, the 50% rate applies, even if payments continue after this date.
• Principal Residence Exemption: This exemption remains unchanged, allowing individuals to claim a full or partial exemption on gains from their principal residence.
• No Triggering of Gains Without Transfer: Tax elections cannot be made to trigger capital gains without an actual transfer of property.
• Annual Threshold for Individuals: The $250,000 threshold is a “use-it-or-lose-it” amount, and gains cannot be averaged over multiple years.
• Non-sharing of Threshold: Individuals cannot share their $250,000 annual threshold with corporations or trusts.
• No Specific Exemptions: No specific assets, corporations, or sectors are exempt from the 66.67% inclusion rate. 
• No Grandfathering: The 50% inclusion rate will not apply to capital gains accrued but not realized before June 25, 2024.

Allowable Business Investment Losses

The deductible portion of allowable business investment losses will increase to 66.67% for losses realized on or after June 25, 2024. This rate applies even if the losses are carried back to any of the three previous years, making it more beneficial to realize such losses after June 25, 2024.

Impacted Scenarios and Planning Tips

Scenarios:

• Gifting Secondary Property: Individuals gifting secondary properties with gains exceeding $250,000 may face higher taxes.
• Incorporated Professionals and Business Owners: The increased inclusion rate will lead to higher integrated tax costs on capital gains and reduced benefits from the corporation’s CDA.
• Selling Qualifying Small Business or Farm Shares: Gains exceeding the enhanced lifetime capital gains exemption will be subject to the new tiered inclusion rates.

Planning Tips:

1. Seek Tax Advice: Consult with tax professionals to evaluate your situation and decide on actions.
2. Work with Advisors: Collaborate with financial advisors to maintain tax-efficient investment strategies.
3. Review Estate Plans: Assess your estate plan and potential tax liabilities, considering the higher inclusion rate.
4. Asset Ownership Mix: Reevaluate holding investments personally versus through a corporation.
5. Explore Wealth-Building Opportunities: Consider tax-preferential vehicles such as individual pension plans or corporate life insurance.
6. Charitable Donations: Donating qualifying capital property can remain a tax-efficient strategy.

These changes underscore the importance of thorough tax planning and professional guidance to navigate the complexities of the new capital gains inclusion rates in Canada. Contact Koroll & Company for more information and to discuss tax planning options.