On April 16, 2024, the Federal Government tabled Budget 2024, which proposed various provisions impacting individuals and businesses. One measure introduced in the budget was an increase to the capital gains inclusion rate. The inclusion rate for corporations, individuals and trusts will increase from one half to two thirds of the actual capital gain; however, individuals will still retain the one-half inclusion rate on the first $250,000 of capital gains annually. The increase is proposed to be effective for capital gains realized on or after June 25, 2024.
On May 21, 2024, Finance Minister Chrystia Freeland confirmed legislation to implement this measure would be introduced before Parliament breaks for the summer on June 21, 2024. The legislation may not be passed into law before then but the changes will still be effective June 25, 2024.
Currently, the combined federal and provincial top marginal rate for individuals on capital gains is 26.76% and is proposed to increase to 35.69% (8.92% increase).
Canadian Controlled Private Corporations will also be impacted as the corporate tax rate on capital gains will increase from 25.08% to 33.44% (8.36% increase). On a flow through basis (i.e. individual extracts the funds from the corporation), the rate will increase from 28.97% to 38.62% (9.66% increase).
Given the additional tax cost is 9% to 10%, taxpayers may want to consider accelerating capital gains for planned dispositions to ensure they are completed prior to the rate increase or consider crystallization strategies to take advantage of the lower inclusion rate. The latter results in a pre-payment of tax so taxpayers need to analyze the benefits of triggering the tax now. The CRA recently confirmed that crystallization of accrued gains prior to the rate increase should not attract application of the General Anti-Avoidance Rule (GAAR) to redetermine the inclusion rate in respect of the crystallized capital gain. However, they confirmed in their interpretation that they would continue to scrutinize capital gain surplus strips. As a result, standard crystallizations will likely be acceptable.
It is crucial to start planning for crystallizations as soon as possible. Contact one of our tax professionals to discuss these matters in the context of your situation before acting upon such information.
