Feds offer few carveouts to capital gains inclusion rate hike

“You actually have to dispose of these properties,” said Henry Korenblum, president of Korenblum Wealth Inc. in Toronto. Allowing an election to pay the tax on an accrued gain “would have been nice from a fairness standpoint [for] people who may not have access to professional advice to engage in transactions pre-June 25.”

There also is no relief for transactions arranged before June 25 but which close on or after that date. “Anyone who’s looking to make any trades before June 25 actually needs to close those trades to lock in the current 50% inclusion rate,” Korenblum said.

The government did provide graduated rate estates (GREs) and qualified disability trusts (QDTs) with access to the annual $250,000 threshold below which the CGIR will remain 50%, which is otherwise available only to individual taxpayers. GREs and QDTs are testamentary trusts created on the death of an individual.

The notice also said capital gains realized in a trust ahead of June 25 could be distributed to beneficiaries on or after June 25, allowing beneficiaries to use their individual $250,000 threshold amounts.

Korenblum said both developments are welcome news.

Hemal Balsara, head of tax, retirement and estate planning, individual insurance, with Manulife Financial Corp. in Toronto, said the carveout for GREs and QDTs is consistent with the federal government’s “soft spot” for these trusts.

For example, both GREs and QDTs have access to the graduated tax rates available to individuals, while all other trusts are taxed at the highest marginal rate. As well, GREs are not subject to alternative minimum tax, and QDTs have access to the AMT basic exemption amount.

The notice of ways and means motion begins the legislative process to implement the proposed increase to the CGIR.

Beginning June 25, 2024, the CGIR will rise to two-thirds from one-half for capital gains of over $250,000 per year for individuals, and on all capital gains for corporations and most types of trusts.

Since the announcement, business advocacy groups have called on Ottawa to provide relieving measures, such as delaying the effective date or providing an election to trigger a deemed gain, but Monday’s notice is largely similar to the government’s statement in the budget.

“A fair and predictable taxation environment is important for Canadians planning for retirement and for businesses planning to invest in Canada,” the government said in a backgrounder accompanying the notice.

In addition to not providing Canadians with an election option, the government said it would:

• not provide an exemption from the two-thirds inclusion rate for any specific assets or corporations;
• not provide special treatment for assets held for a long period;
• not allow capital gains averaging over multiple years when the annual threshold has been exceeded;
• and not allow individuals to share the $250,000 threshold with a corporation they own.

“The guidance provided today is an important step in reducing uncertainty for taxpayers,” said John Oakey, CPA Canada’s vice-president of tax, in a statement. “But with only two weeks remaining until the June 25 implementation date, we are concerned that some taxpayers will have insufficient time to arrange their affairs.”

Korenblum said it was “important for clients to work with their tax advisors” to consider whether to transfer a property before June 25 to, say, a spouse or corporation in order to trigger a gain at the current inclusion rate. Doing so would bump up the adjusted cost base of the property. Such a transfer might be useful ahead of an impending planned sale of a business or other asset that can only take place after the CGIR hike.

“You then may have a minimal or no gain if you sell on or after June 25 with an arm’s-length third party,” Korenblum said.

On April 29, the Canada Revenue Agency issued an interpretation letter stating that selling a big chunk of assets prior to June 25 would not be considered tax avoidance.

“It is our view that where a taxpayer crystallizes an accrued capital gain prior to the increase in the CGIR, the [general anti-avoidance rule (GAAR)] would generally not apply,” the letter said.

However, the CRA cautioned that if the main purpose of the transaction is to obtain a tax benefit other than taxation of a gain at the current CGIR, GAAR may apply.

The 2024 budget also proposed raising the lifetime capital gains exemption (LCGE) to apply to $1.25 million of capital gains, from $1,016,836 for 2024. The higher LCGE would apply to dispositions on or after June 25, with indexation resuming in 2026.

And the government proposed a new Canadian Entrepreneurs’ Incentive, which would reduce the tax rate on capital gains on the disposition of qualifying shares of a small business corporation by an eligible individual.

Key dates

Friday, June 21: 

• Last trading day on Canadian and U.S. markets for settlement on June 24.
• Last scheduled sitting day for the House of Commons before summer recess, and a possible sitting day for the Senate. This is the last day when both chambers of Parliament could sit prior to the June 25 effective date. (The Senate is not scheduled to sit on June 24.)

Monday, June 24:

• Saint-Jean-Baptiste Day, which is a holiday in Quebec. Banks and other institutions are closed in the province.
• Canadian and U.S. markets are open.
• Last day of Period 1 (which covers capital gains and losses realized before the inclusion rate increases).

Tuesday, June 25:

• The inclusion rate rises to two-thirds from one-half on capital gains above $250,000 realized annually by individuals, and on all capital gains realized by corporations and trusts.
• Period 2 begins, which covers capital gains and losses realized on or after the day the inclusion rate increases.

More detail about Periods 1 and 2

For tax years that begin before and end on or after June 25, two inclusion rates will apply. As a result, transitional rules would be required to separately identify capital gains and losses realized before the effective date (Period 1) and those realized on or after the effective date (Period 2).

The annual $250,000 threshold for individuals is fully available in 2024 — it won’t be prorated — and will apply to net capital gains realized in Period 2.

Claimants of the employee stock option deduction will be provided a one-third deduction of the taxable benefit to reflect the new CGIR but will 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.

Net capital losses from prior years will continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the capital gains being offset. This means that a capital loss realized prior to the rate change would fully offset an equivalent capital gain realized after the rate change.