The April 16, 2024 Federal Budget (the Budget) included a proposal to increase the capital gains inclusion rate for individuals, trusts, and corporations. The Budget materials did not include any draft legislation and instead indicated that additional details would be released in the coming months. As a result, there continues to be uncertainty with respect to the specifics of this proposed increase.
Currently, one-half of capital gains are included in computing a taxpayer’s income under the Income Tax Act. This generally results in capital gains being taxed at one-half the rate of ordinary income. The 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, effective June 25, 2024.
Taxpayers will need 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 is not proposed to be pro-rated for 2024, such that the $250,000 limit will apply only to gains realized after June 25, 2024.
The Budget further proposes that the $250,000 capital gains threshold will generally be computed net of:
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- current-year capital losses,
- capital losses of other years applied to reduce current-year capital gains, and
- capital gains in respect of which the taxpayer has claimed the Lifetime Capital Gains Exemption, the proposed Employee Ownership Trust Exemption, or the proposed Canadian Entrepreneurs’ Incentive.
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.
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 immediate on every dollar of capital gains.
As a further consequence of this proposed change, income tax integration will be negatively impacted in circumstances where a holding corporation is being used as an investment vehicle. As a result, the use of a holding corporation as an investment vehicle will likely become tax inefficient.
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, including:
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- Larger capital gains may result in alternative minimum tax for individuals and certain trusts.
- Gains on the sale of a residential property (or rights to a pre-construction residential property) held for less than one year may be deemed to be business income (100% taxable) under the new residential property flipping rules, unless certain exceptions are met.
- The impact of the 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 (QSBC) or qualified farm and fishing property (QFFP).
- The loss of the tax-deferral on an unrealized gain.
For more information on the Budget, click here to read our previously released Commentary.
Please contact your Lipton advisor in order to discuss how you may be impacted by this proposal.
