What are the implications of the changes to the capital gains inclusion rate?

On April 16, Canada's Finance Minister Chrystia Freeland presented the 2024 federal budget. Among the key measures announced is an increase in the capital gains inclusion rate for corporations, trusts and individuals. This measure directly affects the taxes of taxpayers, including corporations and their shareholders, and has significant implications for tax professionals.

Discover how this change in the capital gains inclusion rate may affect you and your company's tax situation.

What is capital gains inclusion rate & capital gains?

In Canada, capital gains are taxed like any other income, but certain factors determine the amount payable. However, only a portion of the value of the capital gain is taxable. This portion is called the inclusion rate. The inclusion rate represents the portion of capital gains, after adjustments, that must be included in the taxable income of an individual, trust, or corporation.

To learn more about capital gains and possible exemptions for corporations incorporated in Canada, see our detailed article on the function of capital gains.

What changes will the federal and state governments make in 2024?

In 2024, the federal government and some provinces announced an increase in the capital gains inclusion rate in the budget.

The details of this increase are as follows:

• For corporations and trusts, the inclusion rate will increase from 50% to 66.7%.
• For individuals with gains over $250,000, the rate will also increase from 50% to 66.7%.
• For individuals with income under $250,000, the rate will remain unchanged at 50%.

Specifically, for individuals, the inclusion rate will remain at 50% for capital gains up to $250,000 realized annually (including through trusts or partnerships). The $250,000 threshold will be fully phased in 2024 and will only apply to capital gains or losses realized on or after June 25, 2024.

These changes will have a significant impact on the taxation of corporations and individuals, requiring a reevaluation of tax strategies.

When will these changes take effect for taxpayers and businesses?

The changes in this new budget will take effect on June 25, 2024. The federal government estimates that 28.5 million Canadians will have no capital gains income in the coming year and that 3 million of them will not reach the $250,000 threshold. As a result, this change should only affect a portion of the population.

However, this action does affect inquiries to professionals who provide tax services. If you believe you may be impacted, you should contact a tax professional as soon as possible to explore your options.

How could this change in the law affect corporations?

The change in the inclusion rate could particularly affect corporations because capital gains will now be taxed at a higher rate, reducing after-tax net income. This change could affect your investment and reinvestment decisions, as well as succession planning or the sale of your business.

For individuals earning more than $250,000 per year, capital gains tax does not apply to principal residences. However, other scenarios may affect you:

• Selling a second home, such as a vacation home, income property, or investment property with a gain over $250,000.
• Selling investments with gains in excess of $250,000 over the original purchase price.
• Evaluating these impacts is critical to adjusting your tax strategy and maximizing your financial benefits.

Are there strategies to mitigate the impact of the new inclusion rate?

Yes, several strategies can be considered to mitigate the impact of the new inclusion rate:

• Review business structure: Consider restructuring your business to optimize capital gains management and reduce your tax exposure.
• Reevaluate investments: Review your investment portfolio and consider rebalancing your assets to minimize the impact of the inclusion rate increase on your capital gains.

These strategies can help you better manage the tax implications of recent changes and protect your company's financial interests. Only a thorough analysis of your individual tax situation will allow you to determine the best approach for your business.

How can T2inc.ca help you with this change?

Changes to the capital gains inclusion rate in 2024 can have a significant impact on business owners. It's important to understand these changes and implement effective strategies to mitigate them.

At T2inc.ca, we are tax accountants specializing in corporate tax filing. We will guide our clients through these changes in the processing of corporate tax returns. To assist you with this transition, our team can refer you to trusted partners to help you make the best tax decisions.

Contact us at support@t2inc.ca and let us know your situation. Our team will be happy to refer you to the most appropriate professionals.