Starting, June 25, 2024, the capital gains inclusion rate will rise to 66% (from 50%) for capital gains above $250,000 realized by individuals and on all capital gains realized by corporations and trusts (except for graduated rate estates and qualified disability trusts).
The change was initially announced in the 2024 federal budget. However, it was only on June 10, 2024, that the government tabled the motion to proceed with the increase in the capital gains inclusion rate, effective June 25, 2024.
In a landscape of ever-evolving tax regulations, this pivotal shift in the capital gains inclusion rate will impact the financial planning strategies for corporations, trusts, and individuals alike.
For Individuals:
- Individuals will continue to pay taxes at a 50% rate on the first $250,000 of capital gains each year. Any gains realized in excess of $250,000 post-June 25, 2024, will embrace the 66.67% rate.
For Corporations and Trusts:
- Starting June 25, 2024, the inclusion rate for capital gains will increase from the current 50% to a robust 66.67%. This significant change will require careful consideration in managing the decision of whether to invest inside the a corporate or trust vehicle or personally.
- The government has extended the annual $250,000 threshold, below which the capital gains inclusion rate (CGIR) remains 50%, to graduated rate estates (GREs) and qualified disability trusts (QDTs). Previously, this benefit was only available to individual taxpayers.
The Ripple Effect:
These amendments are set to cascade across the tax and estate planning domains, influencing:
- This period from now until June 24, 2024, provides an opportunity for taxpayers to capitalize on the lower capital gains tax rate but at a cost of paying taxes earlier than they originally anticipated.
- For taxation years that end on or after June 25, 2024, there will be two different inclusion rates, making tax filings more complex.
- Based on the existing commentary provided by the Department of Finance, it appears that net capital losses realized before the rate change will be available to fully offset an equivalent capital gain realized after the rate change. Therefore, capital losses realized before the change may be more valuable when used to offset gains to be realized at the higher inclusion rate.
- The $250,000 inclusion limit is not prorated, and instead, the full amount will be available to individuals on an annual basis starting in 2024. Tax due upon death, due to the deemed disposition of assets, will be greater for most estates.
- The change also has an impact on postmortem planning, especially in scenarios where the deceased owned shares in a private corporation. Existing solutions such as loss-carry-back planning may not be as efficient as before.
- Corporations will be able to add only 1/3 of the gains (non-taxable portion) to their Capital Dividend Account.
- The change will impact corporations’ Adjusted Aggregate Investment Income (AAII) and thus reduce the Small Business Deduction (SBD) limit available to corporations.
- The incentive to withdraw funds at a capital gains rate from the corporations (using capital gain strip transactions) may no longer be as attractive as the difference between the tax rates on dividends and capital gains has reduced due to the change.
- Corporations retaining profits for investment purposes may need to realign their overall investment strategies. For example, deciding to hold investments personally, using exempt corporate-owned life insurance policies, starting an individual pension plan, or making charitable gifts of public securities through the corporation.
We’re Here to Help:
We ready to help you understand these changes and make the best decisions for your situation. Should you have any questions, please contact us.