Capital Gains Tax Changes: Increased Inclusion Rate & New Exemptions

Overview of Key Changes (Effective June 25, 2024)

The Canadian government has announced significant changes to the taxation of capital gains, which will impact individuals, corporations, and trusts. These changes, introduced through Budget 2024 and the Notice of Ways and Means Motion tabled on June 10, 2024, include an increase in the capital gains inclusion rate and the introduction of new exemptions, including the Canadian Entrepreneurs’ Incentive.

Key Changes in Capital Gains Taxation

1. Increased Capital Gains Inclusion Rate
   • For individuals: The capital gains inclusion rate will rise from 50% to 66.67% on the portion of capital gains exceeding $250,000 in a given year.
   • For corporations and trusts: The capital gains inclusion rate will increase to 66.67% for all capital gains realized after June 25, 2024.
2. Capital Gains Threshold for Individuals
   • The $250,000 threshold for individuals will remain in place, ensuring that the increased inclusion rate of two-thirds applies only to net capital gains exceeding this threshold in 2024.
   • Gains under this threshold will continue to be taxed at the previous 50% inclusion rate.
3. Eligible Business Investment Loss (ABIL) Deduction
   • The inclusion rate for ABILs will also increase, allowing two-thirds of the eligible business investment losses incurred after June 25, 2024, to be deducted against income (up from the previous 50%).
4. Transition Period (2024)
   • For tax years that begin before and end after June 25, 2024, taxpayers must separate capital gains and losses into Period 1 (before June 25) and Period 2 (on or after June 25).
   • Period 1 gains/losses will use the previous inclusion rate of 50%, while Period 2 gains will use the new 66.67% inclusion rate (with adjustments for the $250,000 threshold).

New Exemptions and Incentives

1. Lifetime Capital Gains Exemption (LCGE) Increase
   • The LCGE on the sale of small business shares and farming/fishing property will increase to $1.25 million (up from $1,016,836) starting June 25, 2024.
   • The new limit will be indexed for inflation starting in 2026.
2. Canadian Entrepreneurs’ Incentive
   • A new exemption will reduce the inclusion rate to one-third on up to $2 million in eligible capital gains, specifically designed to encourage entrepreneurship in Canada.
   • Details on this incentive will be released with the updated draft legislation.
3. Principal Residence Exemption Maintained
   • The Principal Residence Exemption (PRE) will continue to allow individuals to exclude gains from the sale of their primary residence from capital gains taxation.

This article is posted at wolterskluwer.com

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