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Changes to Capital Gains Inclusion Rates

June 18, 2024

Capital Gains Inclusion Rate Proposed Change

On April 16th, 2024, the 2024 federal budget proposed to increase the capital gains inclusion rate from 50% to 66.67% for corporations and trusts and from 50% to 66.67% on capital gains in excess of $250,000 for individuals beginning on June 25th, 2024. (Chapter 8: Tax Fairness for Every Generation | Budget 2024, 2024).

What is a capital gain, and how can it affect your taxes?

A capital gain can occur through the disposition of capital property. The Government of Canada website defines capital property as “Depreciable property, and any property, which, if sold, would result in a capital gain or a capital loss. You usually buy it for investment purposes or to earn income. Capital property does not include the trading assets of a business, such as inventory” (Capital Gains – 2023, 2024). Some common examples of capital property are land, buildings, vehicles, equipment used for rental operations or business purposes, and second homes such as vacation properties or cottages.

A capital gain occurs when the proceeds received from the disposition of the disposed asset are greater than the adjusted cost base (cost of the asset plus any expenses incurred to acquire it). A capital gain is calculated by taking the proceeds of disposition less the assets adjusted cost base and any expenses that were incurred to sell the property.

At this time, the inclusion rate is 50%, meaning that only 50% of any capital gain is taxable to an individual, corporation or trust.

What this can mean for Corporations and Trusts:

Prior to June 25, 2024, only 50% of a capital gain is included when calculating the corporation or trust’s net income for tax purposes. The 2024 budget proposes that as of June 25th, 2024, 66.67% of the capital gain will be included when calculating your net income effectively resulting in a higher taxable income and higher taxes on the sale of capital property. For example, if a corporation sold land that had originally cost the corporation $200,000 for $300,000, with the 50% inclusion rate, only $50,000 of this amount would be taxable (($300,000-$200,000)*50%). With the new proposed inclusion rate of 66.67%, $66,670 of the capital gain will be taxable.

What this can mean for Individuals:

For individuals, as of June 25th, 2024, the current 50% inclusion rate will increase to 66.67% for any capital gain in the year that exceeds the limit of $250,000. This means that if your capital gains realized in the year are under the $250,000 limit, the 50% inclusion rate will still apply; but for any amount over $250,000, the 66.67% inclusion rate applies. The legislation does not allow for the averaging of capital gains over multiple years to stay under the $250,000 threshold or any carry-over of any unused threshold.

It is important to note that, the principal residence exemption remains unchanged, meaning that capital gains that arise when selling your principal residence, such as your house, remain exempt from tax and are unchanged.

For individuals, common examples where capital gains could apply are the sale of a second house such as a cottage or rental property, vehicles, and investments.

Summary and Other Considerations:

With the proposed change to the capital gains inclusion rate for all capital gains realized after June 24th, 2024, from 50% to 66.67% for corporations and for capital gains over $250,000 for individuals, we recommend reviewing your investments to determine if you have any unrealized gains. For most individuals, it will be important to manage these gains from year to year to ensure that you can keep them under $250,000 to avoid additional tax. But for corporations and trusts with accrued unrealized capital gains, it may be prudent to speak with your investment broker and tax advisors to determine if triggering some of these gains before June 25, 2024, to minimize the impact on your taxes on the eventual sale makes sense for you.

Note that there is no provision at this time for a deemed disposition election to trigger gains before the new rate applies. The actual disposition must occur.

Capital Gains Reserves

Capital gains reserves will enter into income on the first day of the taxation year, meaning those starting before June 25, 2024, will be subject to the 50% inclusion rate. Later years will follow the prevailing rate of 66.67%. If you have a capital gains reserve that you are bringing into income, it will be important for you to discuss with your tax advisor the implications of continuing it going forward or realizing the remaining amount in 2024.

Employee Stock Options

Under current rules, if you receive a stock option benefit, the full amount of that benefit is taxed as employment income in the year it is received; however, the employee may claim a deduction of 1/2 the stock option benefits if they meet certain conditions. Under the proposed changes, the stock option deduction will change from 1/2 to only 1/3 of the stock option benefit for any options exercised after June 24, 2024, with the $250,000 limit applied to the combined total of stock option benefits and capital gains.

Allowable Business Investment Losses (ABILs)

When a taxpayer incurs a business investment loss from the disposition of shares or debts from a small business corporation or the deemed disposition of bad debts or shares of a bankrupt small business corporation, they have been able, under the current rule, to deduct 50% of that loss against other income (such as employment, business and property income) and carry it back 3 years or forward 10 years. Beginning June 25, 2024, ABILs will be deductible at 66.67% even if the amount is carried back to a period prior to June 25, 2024.

Transitionary Rules for the New Inclusion Rate

For 2024, the tax year will be split into two periods for applying different inclusion rates:

Period 1: Up to June 24, 2024, taxed at 50%
Period 2: From June 25, 2024, taxed at 66.67%.

Taxpayers will need to net capital gains against capital losses for each period to determine the applicable inclusion rates.

If you would like us to review your investment portfolio or if you have further questions regarding the capital gains inclusion rate changes, please contact our office.

*The information contained in this post reflects the proposed change at the date posted and may or may not be relevant at future dates

References

Capital Gains – 2023. (2024, January 23). Canada.ca. Retrieved June 7, 2024, from https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4037/capital-gains.html

Chapter 8: Tax Fairness for Every Generation | Budget 2024. (2024, April 16). Canada.ca. Retrieved June 7, 2024, from https://budget.canada.ca/2024/report-rapport/chap8-en.html

How do you calculate capital gains and capital losses? (2024, January 23). Retrieved June 7, 2024, from https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/completing-schedule-3/publicly-traded-shares-mutual-fund-units-deferral-eligible-small

Tax Fairness for Every Generation. (2024, April 16). Canada.ca. Retrieved June 7, 2024, from https://www.canada.ca/en/department-finance/news/2024/04/tax-fairness-for-every-generation.html

2023 Trust Reporting Requirements (T3 Return)

February 23, 2024

The federal government recently released new federal trust reporting requirements that will be effective for taxation years ending after December 30, 2023 (which means that taxation years ending December 31, 2023, will be affected). These changes will have an impact on many trusts, including those previously exempt from reporting obligations.

Expanded Reporting for Trusts

The new rules significantly broaden the scope of trusts required to file an annual Trust Income Tax and Information Return (“T3”). This includes most personal trusts resident in Canada, even those without income tax liability or distributions during the year. Notably, bare trusts, often used in joint ventures, real estate holdings, or probate planning, may now also be subject to these new reporting requirements.

What Could Constitute a Trust?

Co-Signing or Being on a Property Title: If you have co-signed a loan or are on a property title to help someone (like a child) acquire a property, with the understanding that the benefit, profits, or control are theirs.
Estate Planning: Holding, controlling, or being named on assets that are intended to be passed on or utilized by others in the future.
Asset Management: Managing assets, be it money, bank accounts, property, or investments, with clear instructions (usually in writing) about who benefits or how the assets should be managed or distributed (this can include bank accounts held in more than one person’s name with a balance of $50,000 or more).

Trusts created for holding personal-use assets for estate planning or asset protection, such as those above, which may have previously qualified for the filing exception, will no longer be exempt under the new rules.

New Obligations and Requirements

Expanded T3 Return Filing Obligations

Previously, certain trusts, especially those with no activity or income tax payable (like those holding a vacation property), were exempt from filing a T3. This exemption will no longer apply to most of these trusts starting in 2023.

For supporting information from Canada Revenue Agency, click the link below

CRA Media Release

Expanded T3 Return Reporting Requirements – Beneficial Ownership Information of a Trust:

Express trusts, non-resident trusts and bare trust arrangements may now be required to file a T3 return and must also report additional detailed information.
The new Schedule 15 in the T3 is now required to be completed and filed with all T3’s to report more the additional disclosures.
Schedule 15 requires the name, address, date of birth, jurisdiction of residence, and taxpayer identification number (SIN, BN, ITN) for each settlor, trustee, beneficiary, and any person with influence over trustee decisions.

To download the Schedule 15 form, click on the link below

Schedule 15

Exemptions from the expanded requirements

The following trusts are exempt from filing a T3 return:

Trusts that hold assets with a maximum fair market value (“FMV”) of $50,000 throughout the year (these assets are limited to deposits, government debt obligations, and listed securities)
Trusts that have been in existence for less than three months
Qualified disability trusts
Trusts governed by registered plans (including registered retirement savings plans and tax-free savings accounts)
Mutual fund trusts, segregated funds, and master trusts
Employee life and health trusts
Cemetery care trusts and trusts governed by eligible funeral arrangements
Lawyers’ general trust accounts
Graduated rate estates
Trusts, all the units of which are listed on a designated stock exchange
Trusts that qualify as non-profit organizations or registered charities
Certain government-funded trusts

Additionally, information subject to solicitor-client privilege is exempt from these new reporting requirements.

Filing Deadline

The T3 return along with Schedule 15 must be filed within 90 days of the end of its fiscal year. Most of these trusts have a December 31, 2023, fiscal year-end and will be due by March 30, 2024

Non-Compliance Penalties

The penalty for non-compliance is the greater of $2,500 or 5% of the trust’s maximum fair market value during the year.
These are in addition to existing penalties for failing to file a T3 return, which also carries a maximum penalty of $2,500, meaning trusts could incur multiple penalties.
Standard late-filing penalties may also apply.

Conclusion

The new trust reporting rules mark a significant shift in the transparency and disclosure requirements for trusts in Canada. It is essential for trustees and relevant parties to understand these changes to ensure timely compliance. Our team at Fulcrum Group is here to assist you in navigating these new requirements so please feel free to reach out for further clarification or any assistance you may need in filing your T3s.

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