The much anticipated and super timely (2 weeks before the effective date) draft capital gains inclusion rate legislation was released this week. The draft legislation mostly sticks to what was announced earlier, but there are a few clarification points that are worth noting.
Key Highlights:
Effective Date: The new legislation is effective as of June 25, 2024. As such, if you’re planning on triggering any gains prior to the new rule changes, this needs to be completed by June 24, 2024.
$250,000 Capital Gains Threshold for Individuals: The draft confirms that individuals can still use the 1/2 inclusion rate for up to $250,000 of capital gains annually. This threshold now also includes qualified disability trusts and graduated rate estates (for up to 36 months after an individual’s death). For corporations and most trusts, the 2/3 inclusion rate will apply starting June 25, 2024.
Capital Gains Reserves: A taxpayer might use a capital gains reserve when they receive the sale proceeds in installments over several years. This reserve lets the taxpayer defer recognizing the capital gains income until they actually receive the proceeds, with a maximum deferral period of 5 years (or up to 10 years in rare cases). If you’ve been deferring capital gains using a reserve, those gains will be recognized at the 1/2 inclusion rate if your tax year started before June 25, 2024. After that date, the 2/3 rate will apply. It might be worth considering recognizing any remaining capital gains reserves in 2024 to take advantage of the 1/2 rate.
Trusts and Partnerships: Trusts and partnerships can allocate capital gains realized before June 25, 2024, to beneficiaries and partners, allowing them to use the 1/2 inclusion rate. There’s a form for this allocation that we’ll need to complete, but it’s not available yet.
Increased Withholding Tax for Non-Residents: Starting January 1, 2025, the withholding tax for non-residents selling Canadian real estate will go up from 25% to 35%.
Conclusion:
This draft legislation (finally) gives us some clarity on the new rules. While most of it is what we expected, there are some useful details for planning before the June 25 effective date. For personalized advice on how these changes might affect your financial plans and tax strategies, feel free to reach out to your TG&C advisor.