Update on Capital Gains Inclusion Rate: What You Need to Know 0

Posted On June 27, 2024, by Trevor Buttle

Canada’s Federal Spring 2024 budget proposals significantly changed the capital gains tax. They introduced a new two-thirds capital gains inclusion rate. Understanding the change and the potential implications is crucial for effective tax planning and financial decision-making.

What is the Proposed Change?

Prior to the recent change, capital gains in Canada were taxed based on a 50% inclusion rate, meaning only half of the capital gain was included in taxable income. The new change increases the inclusion rate to two-thirds (approximately 66.67%) for individual Canadians with annual capital gains exceeding $250,000, and for all capital gains earned by corporations and most types of trust funds. This ultimately would result in a higher taxable amount and consequently, a higher tax liability for those realizing capital gains.

What about the Existing Exemption on Primary Residences?

The existing capital gains exemption on primary residences will remain.

When Did The Proposed Change Go Into Effect?

The changes to the capital gain tax inclusion rate are now in effect as of June 25^th. With the legislation finalized and the new inclusion rate officially implemented, there is now a clearer understanding of the current tax, allowing for more informed tax planning and financial decision-making.

Implications

1. 
   

   Increased Tax Liability:

   • Under the new two-thirds inclusion rate, a larger portion of capital gains will be subject to tax. For example, if you realize a capital gain of $100,000, under the current 50% rate, $50,000 is taxable. Under the proposed two-thirds rate, $66,667 would be taxable.
2. 
   

   Alternative Minimum Tax (AMT):

   • The changes to the inclusion rate also affect the Alternative Minimum Tax (AMT). The AMT is designed to ensure that taxpayers with significant income do not pay disproportionately low taxes due to deductions and credits. With a higher inclusion rate, the AMT calculation will also change, potentially increasing the minimum tax payable on capital gains.

Now that June 25^th has passed, the proposed increase in the capital gains inclusion rate from 50% to two-thirds represents a significant shift in Canada’s tax landscape. It is crucial for individuals and entities to adjust their strategies accordingly to manage the increased liabilities resulting from this change. With these substantial implications, it is as essential as ever for taxpayers to stay informed and seek professional guidance.

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This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA advisor.

GBA LLP is a full-service accounting firm in the Greater Toronto Area, but we primarily service all of Ontario as well as the rest of Canada virtually, except Quebec. Our team of over 30, provides Audits and Reviews of financial statements, and Compilations of financial information, as well as corporate tax returns.  We provide specialized corporate tax and succession planning for small and medium businesses, in addition to general advisory services.

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