Tax Partners Tax Alert Capital Gains Inclusion Rate Increase

On April 30, 2024, Chrystia Freeland, Minister of Finance, introduced legislation in Parliament to put into effect many of the measures announced in the 2024 Federal Budget (“Budget 2024”).  Please see the 2024 Federal Budget Commentary we released on April 17, 2024 for full details of all tax measures introduced in Budget 2024.

Legislation to support the measures announced in Budget 2024 with respect to the capital gains inclusion rate changes was not included in the legislation tabled in Parliament on April 30.  Finance Minister Freeland commented that the government is committed to the measures announced in Budget 2024 and that legislation to affect the capital gains inclusion rate changes will eventually be tabled to support those measures.

Below is a brief summary of the measures announced in Budget 2024 related to the capital gains inclusion rate changes:

  • Currently, one half of capital gains are included in a taxpayer’s income. Budget 2024 proposed to increase this inclusion rate to two thirds of the actual gain, effective for capital gains realized on or after June 25, 2024.
  • For individual taxpayers, the increased capital gains inclusion rate will apply only to capital gains in excess of $250,000.
  • For all other taxpayers, including corporations and trusts, there will be no $250,000 threshold, meaning all capital gains incurred by these taxpayers on or after June 25, 2024, will be taxed at a two thirds inclusion rate.
  • For taxation years that straddle June 25, 2024, capital gains will be segregated between gains realized on or before June 24, 2024 and capital gains realized on or after June 25, 2024.
  • The adjustment to the inclusion rate will also apply to capital losses applied to offset capital gains.

All of this leaves taxpayers in a difficult position with respect to whether or not they should be realizing capital gains before June 25, 2024 as the government has announced that the capital gains inclusion rate will be increasing but there is no legislation to support the changes that were announced.  Given what has happened with several tax changes announced in the last few years; first, taxpayers may not have confidence that the legislation which eventually will be tabled will support the measures as announced and second, there are several technical questions to which the answers will only be known once the legislation has been released.

If a taxpayer is going to sell an investment asset and realize a capital gain which would not have been realized if not for the measures announced in Budget 2024, the taxpayer will be prepaying tax.  One of the questions that arises from this – Is there an overall cash benefit to prepay tax?

The answer to this question is not straight forward, it could depend on many variables, such as how long would you keep the investment asset if the capital gains inclusion rate did not increase, what rate of return would you earn on the money you used to prepay tax, is it a sound investment decision to sell the investment asset, or will the measures announced in Budget 2024 have any changes to them when the legislation is introduced.   You may want to do a break-even analysis to determine how many years you would need to hold the investment asset before it is more advantageous to not prepay tax.  One of the issues with any break-even analysis is that by the very nature of the calculations, the analysis itself will have to include variables, such as a rate of return, which are not known and will need to be estimated.

In certain fact situations, it may be advantageous for a taxpayer to accelerate the realization of a capital gain.

Special consideration may need to be given to situations where a taxpayer has either realized capital losses, will realize capital losses, or plans on using capital loss carry forwards in its taxation year which straddles June 25, 2024.

If you have any questions related to the changes in the capital gains inclusion rate or if you would like assistance in either determining whether it may be advantageous for you to realize capital gains prior to June 25, 2024 or assistance in the planning involved to accelerate the realization of a capital gain, please contact Tax Partners at [email protected] or by phone at 905-836-8755.