Capital gains motion provides guidance, but does not alleviate some concerns

The federal government has shed some much-needed light on changes to the capital gains inclusion rate, kicking off the legislative process with just two weeks until the June 25 implementation date. 

A Notice of Ways and Means Motion introduced to the House on June 10 started the legislative process for the new policy and – although final legislation won’t come until the end of July, a full month after the changes take effect – the 56-page document provides some of the legislation needed for CPAs to help their clients through the changes.

“The guidance provided is an important step in reducing uncertainty for taxpayers,” says John Oakey, CPA Canada’s vice-president of tax. “Still, we are concerned that some taxpayers will have insufficient time to arrange their affairs and that there is insufficient time for proper consultation, ahead of implementation.”

In federal budget 2024, the government introduced changes to the proportion of capital gains that are taxable — from one-half to two-thirds. The new rate applies to net capital gains exceeding $250,000 for individuals and to all net gains realized by corporations and to all undistributed net gains realized by trusts.

Since the broad strokes of the new policy were introduced in the budget, CPA Canada has been calling on the federal government to provide Canadians with sufficient implementation details so that Canadians may make informed decisions ahead of the June 25, 2024 effective date.

We are pleased that the motion includes one of the recommendations made by the Joint Committee on Taxation of the CBA and CPA Canada to extend the annual $250,000 capital gain safe harbour to two types of trusts: graduated rate estates and qualified disability trusts.

However, the motion introduced June 10 does not incorporate some of CPA Canada’s other considerations to improve the proposed legislation.

For example, we recommended that Finance push back the implementation date to Jan. 1, 2025, to allow time for proper consultation and to give taxpayers more time to consider their options.

Further, the rules do not contain a mechanism for taxpayers to file an election to realize a capital gain in advance of the June 25 effective date, in order to effectively dispose of an asset under the current inclusion rate without triggering an actual disposition and thus incurring implementation costs. 

In a backgrounder to the motion, the Department of Finance indicated that there are no plans to implement these recommendations.

The backgrounder also clarified that individuals will not be able to share their $250,000 threshold with corporations they own. As a result, the principle of integration will be negatively impacted without corporations having direct or indirect access to the $250,000 threshold, 

This inability for corporations and most other types of trusts to have access to the $250,000 threshold will create inequity in the tax system.

Our recommendation to allow individuals to share their annual $250,000 safe harbour with Canadian-controlled private corporations could have gone some way to allay some of the concerns with under integration of corporate capital gains by individuals whose investments are tied up in corporations.

“We eagerly anticipate the unfolding of the rest of the legislative process on the changes to capital gains inclusion rates and will continue to advocate for reforms that we believe will better integrate the tax system,” Oakey says.

CPA Canada continues to advocate for a comprehensive review of Canada’s tax regime, with the goal of achieving a simpler, fairer, more efficient, and internationally competitive tax system. 

Our tax experts at CPA Canada continue to pore through the detailed amendments to the Income Tax Act to implement the capital gain inclusion rate increase and will further update members ahead of the June 25 deadline.