Since the turn of the millennium, the capital gains inclusion rate in the Income Tax Act has been a critical aspect of how capital gains are taxed. Traditionally, capital gains have been taxed at a rate of 50% of regular income. However, a significant change was introduced in the 2024 Federal Budget that alters this landscape.
Increased Inclusion Rate Effective June 25, 2024
Commencing on June 25, 2024, the capital gains inclusion rate will shift from half to two-thirds for corporations and trusts. For individuals, the rate will also rise to two-thirds for capital gains exceeding $250,000 annually. Importantly, gains below this threshold will still enjoy the half inclusion rate. This adjustment effectively raises the tax rate on impacted capital gains by a third.
Strategic Planning Opportunity
Following the budget announcement on April 16, 2024, there is a ten-week gap until the new inclusion rate takes effect. This delay provides taxpayers with a strategic window to plan ahead. One recommended tactic could involve triggering accrued but unrealized capital gains before the higher tax rate kicks in to reduce the tax burden.
Impact on Tax Neutrality and Planning Measures
The proposed changes introduce a two-thirds inclusion rate for corporate capital gains while maintaining the half rate for individuals on their first $250,000 of annual gains. This deviation disrupts the fundamental principle of tax integration, which aims for tax neutrality between individual income and corporate capital gains. As these modifications may result in higher effective capital gains taxes for corporations, especially on the initial $250,000 of annual gains, planning to mitigate these effects becomes essential.
Early Realization Strategies
Considering various factors, accelerating capital gains realization before June 25, 2024, might be advisable for different groups of taxpayers. Investors with unrealized gains, property owners with accrued capital gains, individuals involved in estate planning, corporations with appreciated assets, and individuals with shares in appreciating private corporations could all benefit from early realization strategies.
Taking Proactive Measures
In anticipation of these impending changes, taxpayers need to assess their unique situations and contemplate proactive steps to lessen the impact of the new regulations. Evaluating how these adjustments could influence one’s financial position, whether as an individual, corporation, trust, or partnership, is crucial. Any actions intended to mitigate the higher inclusion rate should be executed prior to June 25, 2024, to optimize their effectiveness.
Get in touch with Sunny Tathgar for a no-obligation chat about the upcoming capital gains tax increase or any other questions you may have about Real Estate Law.
