The coming changes
The federal government’s recent announcement about the capital gains inclusion rate hike has left many Canadians scrambling to understand the implications. Effective June 25, 2024, the inclusion rate for capital gains will increase from 50% to two-thirds. Here’s a detailed breakdown of what this means for you and how you can prepare.
No Deferral of Effective Date
The new inclusion rate will apply from June 25, 2024, with no option to defer. This means taxpayers cannot elect to lock in the current 50% rate without disposing of their assets. If you want to benefit from the current rate, you must sell or gift the asset before this date.
Limited Relief for Certain Trusts
Graduated rate estates (GREs) and qualified disability trusts (QDTs) will still benefit from a $250,000 threshold, where the inclusion rate remains at 50%. This is a significant relief for those managing these specific trusts, ensuring they aren’t fully impacted by the hike.
Minimal Relief Measures
The government has not provided exemptions for long-held assets, nor allowed capital gains averaging over multiple years. Additionally, individuals cannot share their $250,000 threshold with corporations they own. The focus remains on maintaining a fair and predictable tax environment.
Strategic Moves Before June 25
Consider transferring properties to a spouse or corporation before June 25 to trigger gains at the current inclusion rate. This can be a strategic move if you plan to sell a significant asset soon. Consulting with a tax advisor can help you navigate these options effectively.
CRA’s Position on Pre-June 25 Sales
The CRA has stated that selling assets before June 25 to crystallize gains will not be considered tax avoidance. However, if the primary purpose is to secure a tax benefit beyond the current rate, the general anti-avoidance rule (GAAR) could apply.
New Capital Gains Exemption and Incentives
The lifetime capital gains exemption (LCGE) will increase to $1.25 million. Additionally, a new Canadian Entrepreneurs’ Incentive will reduce the tax rate on gains from qualifying small business shares. These changes aim to support Canadian entrepreneurs and small business owners.
Key Dates to Remember
- June 21: Last trading day for settlement before the hike.
- June 24: Final day of Period 1 for capital gains and losses.
- June 25: New inclusion rate takes effect.
Conclusion
The capital gains inclusion rate hike is a significant change with far-reaching implications. To maximize your tax benefits, consider strategic moves before the June 25 deadline and consult with a tax advisor. Stay informed and proactive to navigate this transition smoothly.