As many of you are aware, the landscape of capital gains taxation in Canada is about to undergo significant changes. Starting June 25, 2024, the inclusion rate for capital gains is set to increase, impacting corporations, trusts, and individuals. These changes, announced in the 2024 federal budget and detailed in recent legislative updates, will affect how capital gains are calculated and taxed.
As we approach this critical date, it is essential for taxpayers to understand the implications and take proactive steps to manage their financial positions. In this article, we will break down the key aspects of the upcoming changes, outline the actions you should consider, and provide insights to help you navigate the new tax landscape effectively.
Key Changes
1. Increased Inclusion Rate:
The inclusion rate for capital gains will increase from 1/2 to 2/3 for corporations, trusts, and also for individuals on gains exceeding $250,000 in a year.
2. Applicability:
The $250,000 threshold applies to capital gains realized by individuals directly or indirectly through partnerships or trusts. The government also confirmed that the $250,000 limit cannot be shared between an individual and a corporation.
Current-year capital losses, previous years' capital losses, and gains eligible for exemptions like the Lifetime Capital Gains Exemption or the proposed Employee Ownership Trust exemption are deducted before applying the threshold.
3. Stock Options and Business Investment Losses:
When employee stock option benefits and capital gains together exceed $250,000, taxpayers can allocate the threshold between capital gains and stock option deductions at their discretion. Think of it as your personal game of tax Tetris.
The deductible proportion of Allowable Business Investment Losses (ABIL) will increase to 2/3 for losses realized on or after June 25, 2024.
4. Trusts and Estates:
Joint property owners each have their own $250,000 threshold.
Graduated Rate Estates and Qualified Disability Trusts are eligible for the $250,000 threshold.
Trusts with tax years overlapping June 25, 2024, must report gains deemed realized by beneficiaries based on when the trust disposed of the property.
5. Partnerships and Mutual Fund Corporations:
Partnerships must segregate capital gains realized before and after June 25, 2024.
Mutual fund corporations can elect to allocate gains proportionally between pre- and post-June 25 periods.
6. Foreign Affiliates and Non-Resident Withholding:
Rules for foreign affiliates and hybrid surplus will be updated accordingly.
The withholding rate on non-resident dispositions of taxable Canadian property will increase to 35% starting January 1, 2025.
Recommended Actions for Taxpayers
With the inclusion rate changes set to take effect soon, taxpayers with significant accrued gains should consider taking action before June 25, 2024.
Here are a few steps to consider:
Review Holdings: Evaluate your portfolio and identify assets with significant accrued gains. It may be beneficial to realize some of these gains before the effective date to take advantage of the current inclusion rate. However, it depends on your holding period, goals and considerations like Alternate Minimal Tax (AMT) should be considered.
Consult Advisors: Speak with your Modernwave Tax advisor to explore your options. Our experts can help you determine the most advantageous strategies and whether it may be beneficial to realize capital gains before the inclusion rate increases.
Transitional Rules
For tax years beginning before and ending on or after June 25, 2024, the new inclusion rates will apply differently. The $250,000 threshold for 2024 will apply only to net capital gains realized on or after June 25, 2024, and will not be prorated.
Final Observations
Taxpayers planning to realize ABILs should consider waiting until June 25, 2024, if they plan to carry back these losses. The transitional rules are complex, especially for trusts and mutual fund corporations, which have elections available to simplify compliance.
Consequential Amendments
Additional technical changes and implementation details for the Canadian Entrepreneurs’ Incentive are expected by the end of July 2024. The Finance Department has indicated that it will not incorporate certain recommended relieving changes, such as allowing capital gains to be averaged over multiple years or exempting specific assets from the new inclusion rate.
Stay Informed with Modernwave Tax
As always, our team at Modernwave Tax is here to help you navigate these changes and optimize your tax strategies. Contact us today to discuss how these updates may affect your financial plans and what steps you can take to stay ahead. Remember, we’re here to help you slice through the red tape and keep your financial pie as intact as possible.
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