The Canadian federal government has proposed a significant change to the capital gain inclusion rate, impacting individuals, businesses, and trusts. This proposed change, included in the Federal budget, suggests an increase in the inclusion rate from 50% to 67% for individuals earning more than $250,000 in capital gains annually, as well as for all corporations and trusts. If adopted, these changes will take effect on June 25, 2024. Below, we explore the implications for different entities.

Individuals

General Impact

For individuals, the proposed legislation changes the tax treatment of capital gains significantly. Currently, individuals pay tax on 50% of their capital gains, regardless of the amount. Under the new legislation, this 50% inclusion rate will apply only to the first $250,000 in capital gains. Any gains exceeding this threshold will be taxed at a 67% inclusion rate.

Impact on Cottages and Investment Properties

The proposed changes will also affect those who own secondary residences, such as cottages, and investment properties. Owners of such properties need to be aware of the potential increase in tax liability. If you are trying to avoid the higher tax rate, it is crucial to complete the sale of your non-principal residence or investment property no later than June 24, 2024.

Despite the changes, the principal residence exemption still applies, allowing you to designate a secondary residence as a principal residence for tax purposes. However, it is essential to seek advice from a tax professional before making this designation. Claiming your secondary residence as your principal residence could nullify the tax exemption if you later sell your primary residence.

For investment properties, the impact of the increased inclusion rate is substantial. Real estate investors who plan to sell properties should carefully consider the timing of their sales. The increase from a 50% to a 67% inclusion rate means a significantly higher portion of the capital gain will be subject to taxation, increasing the overall tax burden on the sale of these properties.

Lifetime Capital Gains Exemption

The lifetime capital gains exemption on the sale of small business shares, farming, and fishing property remains unaffected by the proposed changes. This exemption continues to provide significant tax relief for eligible properties.

Businesses

The proposed increase in the capital gain inclusion rate will also impact corporations. Currently, businesses pay tax on 50% of their capital gains. Under the new legislation, all corporations will be subject to a 67% inclusion rate, regardless of the amount of capital gains. This change could have substantial financial implications for businesses that frequently realize capital gains from investments or asset sales.

Businesses should consult with their accountants and financial advisors to understand the full impact of these changes on their tax liabilities and to explore potential strategies to mitigate the increased tax burden. Early planning and strategic financial management will be crucial to navigate this new tax landscape effectively.

Trusts

Trusts are not exempt from the proposed changes and will also be subject to the increased capital gain inclusion rate. Like corporations, trusts currently pay tax on 50% of their capital gains. Under the new legislation, all trusts will face a 67% inclusion rate. This change will affect various types of trusts, including family trusts, testamentary trusts, and others that hold capital assets.
Trustees should review their investment strategies and consider the timing of asset sales to minimize the impact of the higher inclusion rate. Engaging with tax professionals and legal advisors will be essential to ensure compliance with the new rules and to optimize the trust’s tax position.

Conclusion

The proposed changes to the capital gain inclusion rate represent a significant shift in tax policy, with widespread implications for individuals, businesses, and trusts. Individuals with substantial capital gains, particularly those with secondary residences, need to consider the timing of property sales and consult with tax professionals. Businesses and trusts must reassess their financial strategies to manage the increased tax burden effectively.

As always, this information is intended to provide a general overview and should not be taken as tax or legal advice. For specific guidance on how these changes may affect you, please contact your accountant, realtor, or real estate lawyer.

For more detailed information and personalized advice, please reach out to our team. We are here to help you navigate these changes and plan effectively for your financial future.