The Canadian government recently announced changes to how capital gains are taxed, affecting both individuals and corporations. Here's a breakdown of some key changes and what they mean for you:

1. Capital Gains Inclusion Rate Increase: Currently, half (50%) of a capital gain is included in a taxpayer's income. The government plans to increase this rate from 50% (one-half) to 66.67% (two-thirds) for corporations and trusts. For individuals, this higher rate will apply to capital gains exceeding $250,000 realized in the year, starting June 25, 2024.

2. Basic Inclusion Rate and $250,000 Threshold for Individuals: Starting June 25, 2024, the portion of capital gains included in taxable income will increase to 66.67% (two-thirds). However, individuals can apply a special provision to reduce the inclusion rate to 50% for gains below $250,000. This means only half of these gains will be taxed. Gains exceeding $250,000 will be taxed at the higher rate of 66.67%.

3. Lifetime Capital Gains Exemption (LCGE) Increase: The LCGE can be claimed by individuals on the capital gains realized from the disposition (sale or transfer) of qualified farm and fishing property or qualified small business corporation shares. The LCGE limit will increase to $1.25 million for eligible capital gains, effective for dispositions on or after June 25, 2024. This means more of your gains may be exempt from tax.

4. Employee Stock Option Deduction: With the new changes, if an employee exercises their stock options on or after June 25, 2024, they will receive a basic one-third deduction on this taxable benefit. This means that two-thirds of the benefit will now be taxable, rather than half.

5. Allowable Business Investment Losses (ABIL): Starting June 25, 2024, the deductible portion of an ABIL will increase. Previously, if you incurred an ABIL, you could deduct 50% of that loss from your income. With the new changes, you will be able to deduct 66.67% (two-thirds) of the loss. This means that a larger portion of your ABIL can be used to reduce your taxable income, potentially lowering your overall tax liability.

6. Non-Resident Dispositions of Taxable Canadian Property: Non-residents selling taxable Canadian property will face an increased withholding rate of 35%, up from 25%, for sales occurring on or after January 1, 2025.

In addition to the changes in capital gains taxation, the government wants to reassure Canadians about what will not change:

1. Principal Residence Exemption: You won't pay taxes on the profit from selling your home. This exemption remains the same, ensuring you keep all the money from selling your primary residence.
2. Tax Choices: You cannot choose to pay taxes on gains or losses that only exist on paper (unrealized gains or losses). To owe capital gains tax, you must actually transfer or sell the property.
3. Capital Gains Averaging: You can't average gains over several years to stay under the $250,000 threshold. You'll only pay tax on gains over this amount in a single year.
4. Threshold Splitting: You can't split the $250,000 individual threshold with corporations you own. This benefit only applies to individual taxpayers.
5. Exemptions: No specific assets or corporations will be exempt from the two-thirds inclusion rate. This ensures fairness across all sectors.
6. Time-based Rules: There won't be special rules based on how long you've held an asset. All capital gains will be treated the same, regardless of the holding period.

These changes aim to create a fairer tax system and ensure that capital gains are taxed appropriately. For further details on the Capital Gains Inclusion Rate and its impact on Canadian taxpayers, visit the official Government of Canada website. This resource provides detailed explanations and examples related to the changes in the capital gains tax regime, ensuring you have all the information you need to navigate these tax changes effectively.

If you have any questions or need assistance with understanding how these changes to capital gains tax may affect you or your business, feel free to reach out to us at PKF Antares Professional Corporation. You can contact us at 403-375-9955 or https://www.pkfantares.com/contact/. We're here to help!

References:

https://www.canada.ca/en/department-finance/news/2024/06/capital-gains-inclusion-rate.html

https://www.canada.ca/en/department-finance/news/2024/06/fair-and-predictable-capital-gains-taxation.html