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New capital gains legislation: what you need to know

Recent government changes to capital gains tax could have a significant impact on your finances and investment strategies.

What changes?

As part of its 2024 budget, the Canadian government has introduced significant changes to increase tax fairness. Effective June 25, 2024, the capital gains inclusion rate will increase from 50% to 66.67% on capital gains in excess of $250,000 per year for individuals. For corporations and most types of trusts, this change in inclusion rate also applies, but to all realized capital gains (the latter do not benefit from the exclusion threshold for the first $250,000 of capital gains).

The Notice of Ways and Means Motion to increase the capital gains inclusion rate was published on June 10. Based on our analyses, the tax provisions introduced by the government could lead to a potential problem concerning dividends from the Capital Dividend Account (CDA).

To the extent that a DCC dividend is declared and paid in a taxation year that straddles June 25, 2024, the DCC could be considered excess in certain circumstances, even if the DCC was paid prior to June 25, 2024.

Here is a summary of the details published by the federal Department of Finance:

Exemptions and new thresholds

  • Exemption for principal residences: maintained.
  • New annual threshold of $250, 000: individuals continue to benefit from the current 50% inclusion rate on capital gains.
  • Lifetime capital gains exemption (as of June 25, 2024): increased to $1,250,000 for sales of small business shares and farm or fishing property.

Transition year

For 2024, two inclusion rates will apply to capital gains realized by taxpayers: 50% for capital gains and losses realized before June 25, 2024, and 66.67% for capital gains and losses realized on or after June 25, 2024 (subject to the new $250,000 threshold for individuals). It will therefore be necessary to determine the date of disposition of the assets to determine the period to which the capital gains or losses relate.

For example, an individual who realizes a capital gain of $600,000 on January1, 2024 and a capital gain of $400,000 on August1, 2024 should include a taxable capital gain of $525,005 in his or her taxable income for 2024.

((600 000$ * 50 %) + ((250 000 $ * 50 %) + ((400 000$ – 250 000 $) *66,67 %)))

Capital dividend

Despite the bill’s publication on June 10, there are still uncertainties surrounding the treatment of capital gains and losses arising after June 24, 2024 in the calculation of a company’s Capital Dividend Account (“CDA”).

Based on the information currently available, and in order to determine the taxable capital gain for the year ending June 25, 2024, an average inclusion rate for the year will have to be calculated. Since the average rate will be a ratio of net capital gains and losses realized before June 25, 2024 to those realized after June 24, 2024, it may be necessary to wait until the company’s year-end to determine its CDA balance based on all transactions. Depending on the capital gains and losses realized during each of these periods, the results may be unfavorable depending on the desired planning.

In view of this, it may be preferable to wait until the end of a company’s fiscal year before choosing a capital dividend. Further clarification from the Ministry of Finance is expected. In fact, several representations have been made to have this corrected in the next version of the bill, which should be published towards the end of July 2024. However, no confirmation has yet been issued by the Ministry. Insofar as possible, it may also be wise not to carry out transactions generating capital gains and losses affecting the CDC as of June 25, 2024, until the tax authorities have published new information on this subject.

Changes to stock option deductions

Certain deductions may be available when an employee exercises a stock option so that the stock option benefit is included in income in a manner similar to a capital gain. The deduction rate will therefore be adjusted to give an inclusion rate of 66.67%.

It will be possible for employees benefiting from stock option deductions to use all or part of their $250,000 annual threshold to reduce the inclusion to 50% on stock options exercised in a year.

How does this affect you?

We recommend that you reassess your investment and tax planning strategies in light of these new measures. Our team is available to help you navigate these changes and optimize your finances accordingly.

Please do not hesitate to contact us if you have any questions, or to discuss how best to structure your investments in the future.

For more information on the change to the capital gains inclusion rate, click here.

To reread our 2024 budget summary.

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