Budget 2024: To trigger, or not to trigger, capital gains

Tax
05-03-2024

On April 16, 2024 the Liberal Government of Canada released their proposed 2024 Federal Budget. One key proposal is a change to the capital gains inclusion rate to 66.7% from 50.0%. For all corporations and trusts, the new inclusion rate will apply to all realized capital gains. For individuals, the new inclusion rate applies only to realized capital gains exceeding $250,000 on an annual basis. Individuals with realized capital gains below $250,000 per year will maintain the 50.0% income inclusion rate. The proposed changes will take effect on and after June 25, 2024.

If the proposed changes are passed, the result would be a very rapid transition to the higher capital gains inclusion rate. This creates a short timeframe to action planning opportunities to get a 50.0% inclusion rate.

New information about the proposed capital gains rate change is being released daily. Possible delays in passing legislation or amendments to the capital gains proposal are entirely unknown. As of the date of publication, draft legislation has not been released for our review. If passed, the capital gains rate change will have a pervasive effect on the Canadian Income Tax Act.

A brief history of the capital gains inclusion rate:

To 1972                         Nil

1972-1987                    50.0%

1988-1989                    66.7%

1990-1999                    75.0%

2000-2024                  50.0%

2024                              66.7% proposed

Those affected by an increase to the capital gains inclusion rate:

  • Individuals and trusts holding marketable securities with unrealized gains
  • Corporations with marketable securities and other assets with unrealized gains
  • Owners of cottages, second homes, or rental properties
  • Individuals leaving Canada
  • Deceased taxpayers
  • Active sellers of businesses, farms, real estate or other assets with transactions closing soon
  • Others, on a fact-specific basis

Should you trigger capital gains?

Reasons – Yes:

  • You assume the 66.7% capital gains inclusion rate change is permanent and will apply on and after June 25, 2024
  • You are planning to or in the process of selling assets soon and may look to accelerate timeline to close
  • You are seeking to leave Canada and may accelerate timing
  • Trusts approaching 21-year rule without tax planning options for deemed dispositions
  • Elderly taxpayers, especially those without a surviving spouse, who may face a deemed disposition in a short timeframe
  • You are carrying out a capital gains strip transaction
  • Other reasons, on a fact-specific basis

Reasons – No:

  • Capital gains, if triggered pre-emptively, may result in a prepayment of tax which can include alternative minimum tax (AMT) calculated under the new 2024 rules
  • Payment of tax using borrowed funds incurring interest is not deductible
  • The proposed change to the capital gains inclusion rate is proposed – new information is being released daily
  • If many people rush to sell assets there could be a depressed market
  • CRA has not commented on how the amended and expanded general anti-avoidance rules (GAAR) could apply
  • There are inherent risks that must be assessed and re-assessed – rules are complex requiring specialized advice
  • Staying cautious

Overall, the proposed change to the capital gains inclusion rate is expected to impact more Canadians than stated by the Government of Canada. Analysis of your situation should be comprehensive in nature, evaluating the possible risks, benefits, and costs of acting, or not acting, before June 25, 2024.

If you would like to proceed with a comprehensive analysis or have any questions, please contact our Senior Tax Manager Brad Grsic (250.370.9178 | [email protected]).

Disclaimer: This article is intended to inform readers in general terms. It is not intended to provide any tax, investment or business advice. Please consult your advisor if you have any questions about your unique situation. While we have tried to ensure the accuracy of the information in this article, we accept no liability for errors or omissions.



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