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Under the current tax rules, if you dispose of capital property (other than your principal residence) for a profit, only 50 per cent of the capital gain is included in taxable income. The budget proposed to increase the capital gains inclusion rate to two-thirds (66.67 per cent) for corporations and trusts, and to two-thirds on the portion of capital gains realized for the year on or after June 25, 2024, that exceeds $250,000 for individuals.
The $250,000 threshold will apply to capital gains realized by an individual, net of any capital losses either in the current year or carried forward from prior years. Employees who exercise employee stock options and who can currently claim a 50 per cent deduction will now only be entitled to a one-third deduction of the taxable benefit to reflect the new capital gains inclusion rate. They will still, however, be entitled to a 50 per cent deduction of the taxable employment benefit, up to a combined limit of $250,000 for both employee stock options and capital gains annually.
Capital losses carried forward from prior years will 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 effectively means that a capital loss realized at the current 50 per cent allowable rate will be fully available to offset an equivalent capital gain realized after the rate change.
Giving taxpayers 10 weeks’ notice before the new two-thirds inclusion rate kicks in is helpful in terms of tax planning, but it will mean a complex tax reporting system for 2024 since two different inclusion rates will apply.
As a result, the government announced that transitional rules will be introduced that will require taxpayers to separately identify capital gains and losses realized before the June 25, 2024, effective date (period 1), and those realized on or after that date (period 2).
Individuals will therefore be subject to the higher two-thirds inclusion rate on their realized gains arising in period 2 that exceed the $250,000 threshold, except to the extent that those net gains are offset by a net loss incurred in period 1 (or some prior period loss carryforward).
The annual $250,000 threshold for individuals only applies to net gains realized in period 2 and isn’t prorated for 2024.
Considering that capital gains realized from June 25, 2024, onwards in a corporation will be taxable at a two-thirds rate whereas individuals can benefit from a 50 per cent inclusion rate on the first $250,000 of annual gains, some investors may need to consider whether holding investments with the potential for capital gains in a corporation still makes sense.
For everyone else, especially investors with significant accrued capital gains in a non-registered portfolio, it means you’ll need to make some big decisions on whether to crystallize your gains (assuming they’re more than $250,000) at a 50 per cent inclusion rate prior to June 25, or continue to hold onto those winners and face a 66.67 per cent inclusion rate when you ultimately do sell. It may also mean intentionally realizing $250,000 of capital gains annually to take advantage of the lower 50 per cent inclusion rate going forward.
Business owners contemplating a sale, vacation-home owners and investors who own income properties need to consider the broader implications of this pending inclusion rate increase on their longer-term disposition planning.
https://financialpost.com/personal-finance/taxes/capital-gains-tax-amt-rules-federal-budget-2024
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