Government Introduces Notice of Ways and Means in Canadian Parliament to increase the Capital Gains Inclusion Rate
On Monday June 10, the Government tabled a Notice of Ways and Means Motion to introduce legislation proposed in Budget 2024. Federal budget announced on April 16, 2024, proposed changes to the capital gains inclusion rate that can have significant implications for taxpayers with accrued and unrealized capital gains. The Government has released a backgrounder on this topic which provides details to how this change in inclusion rate will impact taxpayers.
Backgrounder on the Capital Gains inclusion rate changes
Effective June 25, 2024, the capital gains inclusion rate will increase to 2/3 (two-thirds) from the current 50% rate. Individuals will be allowed the 50% inclusion rate on their first $250,000 of capital gains annually, whereas corporations and trusts will not have this treatment (i.e. the 2/3 rate applies to the first dollar of capital gain realized by a corporation or a trust on or after June 25, 2024).
This is effectively a 33% increase to the effective tax rate on capital gains.
Actions to consider:
- Selling and triggering capital gains for any investments with significant accrued capital gains before June 25, 2024. This needs to be compared against the opportunity costs because you will have less compounding growth thereafter. Depending on the rate of return, after about 10 years the initial tax savings with the lower inclusion rate would be outweighed by the decreased compounding return due to time value of money.
- If the investments are held within a corporation, be advised that triggering capital gains could reduce your small business deduction limit (ie. an added cost to realizing gains ). In addition, realized gains before June 25 will add 50% of the realized gain to the Capital Dividend Account. Realized gains after June 25 will only add 33.33% of the gain to the account. A capital dividend is a tax-free dividend to shareholders.
- If you are selling publicly traded securities, the sale should be executed by June 21, 2024, to allow for the settlement date to occur before June 25.
- Triggering gains on real estate may be more difficult, and you will need to consider the interest costs if you are borrowing money to pay the tax.
- Consider corporate rollover or spousal transfers before June 25, 2024.
- Consider your charitable giving strategy to donate publicly trading securities with higher accrued gains.
- Consider holding investments personally moving forward, for investments that generate capital gains because of the $250,000 limit available to individuals.
- For trusts, consider distributing capital gains among family members to access each person’s $250,000 capital gains limit for their 50% inclusion rate.
Please contact your advisor at HVGP with any questions you may have.
