On June 10th, 2024, the Federal government released the draft legislation detailing the changes to the capital gains inclusion rate, which is to be effective on June 25, 2024. This tax change was the most significant tax change arising from the 2024 Federal Budget and is reviewed in our blog post from May 6th, Navigating the 2024 Federal Budget Capital Gains Inclusion Rate Increase.
Overall, the draft legislation is consistent with what was originally announced in Budget 2024. However, the draft legislation does contain some additional points of clarification concerning the upcoming capital gains inclusion rate changes.
$250,000 Capital Gains Threshold for Individuals
The draft legislation confirms the annual $250,000 capital gains threshold whereby up to $250,000 of capital gains realized by individuals will continue to be entitled to the ½ inclusion rate. Except as noted below, this $250,000 capital gains threshold is only applicable to individuals. Therefore, all corporations and most trusts would be subject to the 2/3 capital gains inclusion rate on all dispositions that occur on or after June 25, 2024.
This draft legislation expanded eligibility for the $250,000 threshold to include qualified disability trusts. In addition, graduated rate estates, an individual’s estate where it has been less than 36 months since the individual’s date of death, are also eligible.
Treatment of Capital Gains Reserves
A taxpayer may have utilized a capital gains reserve when they receive portions of the sale proceeds over the course of several years. This reserve allows a taxpayer to defer recognizing capital gains income until they receive such proceeds up to a maximum 5-year deferral period (10 years in very limited circumstances).
As part of this draft legislation, any amounts included in income from a capital gains reserve are deemed to be realized on the first day of the taxpayer’s taxation year. Therefore, the capital gains reserve income is subject to the 1/2 inclusion rate if the taxpayer’s taxation year began prior to June 25, 2024. Accordingly, all capital gains reserve income is subject to the 2/3 inclusion rate for taxation years that begin on or after June 25, 2024. Thus, one tax planning consideration would be to recognize the remainder of a capital gains reserve in 2024 in order to utilize the 1/2 inclusion rate.
Allocation of “Pre-June 25” Capital Gains by Trusts and Partnerships
Trusts and partnerships will be able to designate the portion of capital gains realized prior to June 25, 2024, when allocating capital gains income to beneficiaries and partners respectively. Such an allocation ensures that a trust beneficiary or partner is able to utilize the 1/2 inclusion rate on such capital gains. This allocation will require the trust or partnership to complete and file a prescribed form, which has not yet been released, when filing their 2024 return.
Increased Withholding Tax for Non-Residents Selling Canadian Real Estate
Under the current rules, there is a withholding tax equal to 25% of the sale proceeds when a non-resident of Canada sells Canadian real estate. A certificate of compliance can be applied for by the non-resident to reduce this withholding tax to equal 25% of the capital gain instead. With the upcoming increase to the capital gains inclusion rate, the applicable percentage for this withholding tax will increase from 25% to 35% on dispositions occurring on or after January 1, 2025.
Conclusion
The release of this draft legislation provides some clarity on the government’s approach to implementing the capital gains inclusion rate changes. While the core elements remain consistent with the 2024 Federal Budget announcement, the additional details provide assistance regarding any planning being considered prior to the June 25, 2024, effective date. For more detailed insights into how these changes might impact your financial planning and tax strategies, please contact your Bateman MacKay advisor for personalized advice. Stay informed by subscribing to our blog and following us on LinkedIn for the latest updates and professional guidance on navigating these new tax regulations. Subscribe to our blog or follow us on LinkedIn for ongoing accounting and tax articles to bring you and your business value.
