Joint Committee's recommendations on capital gains tax increase
The Joint Committee on Taxation of the CBA and Chartered Professional Accountants of Canada address the most time-sensitive issue for taxpayers stemming from the increase in the capital gains inclusion rate.
In a nutshell: The 2024 Federal Budget proposes a significant change to Canada’s capital gains tax landscape. It intends to increase the inclusion rate from 50 per cent to 66.7 per cent for gains realized after June 25, 2024:
- For individuals, the 50 per cent inclusion rate will still apply to capital gains up to $250,000 each year.
- Corporations and trusts will face a higher inclusion rate on all capital gains.
The Joint Committee raises several concerns, including fairness surrounding rushed transactions that may be triggered by the change, as well as recommendations to include grandfathering provisions, thresholds for corporations and trusts, and carry-forward thresholds.
Election to realize a capital gain
The joint committee recommends that taxpayers be allowed to realize capital gain by filing an election. This election would deem designated assets to be disposed of for fair market value proceeds before June 25, providing a way for taxpayers to realize capital gains without actually disposing of assets.
Given the lack of draft legislation and fairness concerns surrounding rushed transactions, this process would ensure equal opportunities for gain realization, particularly for middle-class taxpayers and those with illiquid assets. It would also promote simplicity and efficiency without negatively impacting revenue targets for the 2024/25 fiscal period, writes the joint committee.
It is recommended that taxpayers be allowed to file an election to pay the resulting tax liability over time, in keeping with transitional rules for unforeseen taxes.
Overall, the joint committee also considers the 10-week transition period from the announcement to the effective date insufficient for proper planning due to the absence of draft legislation. It recommends extending the effective date to January 1, 2025.
Private corporations and integration
Many middle-class Canadian individuals and small business owners indirectly own and operate their businesses through private corporations, including restaurant owners, tech entrepreneurs, doctors, and farmers. Assets accumulated within these corporations are typically used to expand business operations or support individuals through retirement. Many of these individuals, without employment pensions to rely on, accumulate investments in their corporations to fund what may amount to over 20 years of retirement.
“However, with no proposed threshold provided to corporations, many ordinary Canadians who operate their businesses indirectly through private corporations will unfairly lose access to the $250,000 safe harbour,” the submission says. “This result does not align with the government’s policy intent.”
The joint committee proposes that the rules be drafted to allow individuals to share their annual $250,000 safe harbour with a private corporation of which they are a (direct or indirect) shareholder.
Trusts
Trusts, including graduated rate estates and qualified disability trusts, should be granted their own threshold to mitigate the impact of the increased inclusion rate on beneficiaries, aligning with estate planning objectives.
Carry forward of threshold
To better reflect Canadians’ capital gains realization patterns, the joint committee also recommends allowing the carrying forward of unused threshold amounts and indexing the $250,000 threshold. “[A]n annual ‘use-it-or- lose-it’ threshold is not well matched to the reality of how this segment of the population often realizes capital gains,” the submission states.
Grandfathering
Addressing the concerns of taxpayers who entered binding agreements before the budget was tables, the joint committee proposes that grandfathering provisions be included to exempt these agreements from the increased inclusion rate.
Avoiding retroactive effects
The joint committee says that clarifications and amendments are needed to ensure that capital gains realized before the effective date are not inadvertently taxed at the higher rate. Specific areas requiring attention include capital gains reserves, hybrid surplus resulting from capital gains realized by foreign affiliates, stock options, and allocations of capital gains by trusts and partnerships.
