New Capital Gains Inclusion Rates
There may a significant effect on your taxable income with the new capital gains inclusion rates. Currently, one-half of a capital gain is included in computing a taxpayer's income. This is referred to as the capital gains inclusion rate. The current one-half inclusion rate also applies to capital losses.
INDIVIDUALS
The April 17, 2024 Budget proposes to increase the capital gains inclusion rate from one half to two thirds on the portion of capital gains realized in the year that exceed $250,000 for individuals, for capital gains realized on or after June 25, 2024.
The $250,000 threshold would effectively apply to capital gains realized by an individual, either directly or indirectly via a partnership or trust, net of any:
current-year capital losses;
capital losses of other years applied to reduce current-year capital gains; and
capital gains in respect of which the Lifetime Capital Gains Exemption, the proposed Employee Ownership Trust Exemption or the proposed Canadian Entrepreneurs' Incentive is claimed.
Claimants of the employee stock option deduction would be provided a one-third deduction of the taxable benefit to reflect the new capital gains inclusion rate, but would be entitled to a deduction of one-half the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains.
Net capital losses of prior years would continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the capital gains being offset. This means that a capital loss realized prior to the rate change would fully offset an equivalent capital gain realized after the rate change.
For tax years that begin before and end on or after June 25, 2024, two different inclusion rates would apply. As a result, transitional rules would be required to separately identify capital gains and losses realized before the effective date (Period 1) and those realized on or after the effective date (Period 2). For example, taxpayers would be subject to the higher inclusion rate in respect of the portion of their net gains arising in Period 2 that exceed the $250,000 threshold, to the extent that these net gains are not offset by a net loss incurred in Period 1 or any other taxation years.
The annual $250,000 threshold for individuals would be fully available in 2024 (i.e., it would not be prorated) and would apply only in respect of net capital gains realized in Period 2.
Other consequential amendments would also be made to reflect the new inclusion rate. Additional design details will be released in the coming months.
An RBC Wealth Management article provides an excellent discussion on whether an individual should recognize a gain now at 66.67% or wait until a later date when you most likely will need to withdraw the funds from your investment portfolio. Please refer to the article for the full details.
The following table shows the break-even holding period for the preceding example using the same assumptions but at various capital growth rates of return.
If you’re deciding whether to sell before June 25 or continue to hold, important considerations will be the expected rate of return, your time horizon and the potential incremental capital gains tax. In conclusion, the lower the future expected rate of return, the longer the break-even holding period will be. Conversely, the higher the future expected rate of return, the shorter the break-even holding period (as such, if you hold a security with a higher rate of return and you plan to hold on to this security for the long term, it likely doesn’t make sense to sell just to take advantage of the lower inclusion rate).
Other considerations as to whether or not you should realize a gain are:
Available capital losses to apply to capital gains
Donations to apply against tax payable
If the lifetime capital gain exemption applies to the capital gain
If the Alternative Minimum Tax (AMT) calculation applies
LIFETIME CAPITAL GAIN EXEMPTION
(For Individuals Only)
The amount of the Lifetime Capital Gains Exemption (LCGE) is $1,016,836 in 2024 and is indexed to inflation.
Budget 2024 proposes to increase the LCGE to apply to up to $1,250,000 of eligible capital gains. The exemption can be claimed against the gain on the sale of qualifying farm property including shares of qualifying farm corporation shares or qualifying small business shares. This measure would apply to dispositions that occur on or after June 25, 2024. Indexation of the LCGE will resume in 2026.
CORPORATIONS AND TRUSTS
The April 17, 2024 Budget proposes to increase the capital gains inclusion rate from one half to two thirds for capital gains realized on or after June 25, 2024 corporations and trusts net of
current-year capital losses;
capital losses of other years applied to reduce current-year capital gains.
Net capital losses of prior years would continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the capital gains being offset. This means that a capital loss realized prior to the rate change would fully offset an equivalent capital gain realized after the rate change.
With the increase in tax on the first dollar of capital gains realized in the corporation, when looking at the passive investment income tax rates in a corporation, there is now almost equality when earning eligible dividends and capital gains in a corporation. This should be considered when determining the makeup of your portfolio in your corporation. Further, when comparing the combined corporate and personal tax rates on capital gains that are earned in the corporation and then distributed to the top marginal tax rate on capital gains earned personally, there’s a significant tax cost to earning the capital gains inside the corporation, especially where the individual is subject to the 50% inclusion rate.
It’s not yet known whether the refundable portion of taxes paid by a corporation on passive investment income will be adjusted to allow for better integration given the proposed capital gains inclusion rate changes.
The same RBC Wealth Management article provides an excellent discussion of whether a corporation should recognize a gain now at 66.67% or wait until a later date when you most likely will need to withdraw the funds from your investment portfolio.
The preceding table shows the shareholder can expect the difference in after-tax value to be the same sometime between the ninth and 10th year. Therefore, if the corporation expects to keep the securities and the shareholder will not extract the funds for at least 10 years, they will be better off not selling now and rather, holding the investment. In other words, if the corporation plans to hold the security for less than 10 years and the shareholder will be withdrawing the proceeds, they will be better off selling before June 25 at the 50% inclusion rate. The following table shows the break-even holding period for the preceding example using the same assumptions but at various capital growth rates of return.
Other considerations as to whether or not you should realize a gain are:
Available capital losses to apply to capital gains
Donations to apply against taxable income