Overview of Key Changes in Capital Gains Taxation – Budget 2024
On June 10, 2024, Chrystia Freeland, Deputy Prime Minister and Minister of Finance, introduced An Act to amend the Income Tax Act and the Income Tax Regulations in Parliament. The proposed changes, part of Budget 2024, will impact how capital gains are taxed in Canada, with significant adjustments for individuals, corporations, and trusts.
The primary changes include an increase in the capital gains inclusion rate and new exemptions designed to support small business owners and entrepreneurs. These reforms are set to take effect on June 25, 2024.
Key Changes in Capital Gains Taxation
1. Increased Capital Gains Inclusion Rate
- For Corporations and Trusts: The inclusion rate will increase from 50% to 66.67% (two-thirds) for capital gains realized after June 25, 2024.
- For Individuals: The inclusion rate will increase to two-thirds for capital gains exceeding $250,000 in a given year. Capital gains below this threshold will still be subject to the current 50% inclusion rate.
2. Transition Year (2024)
For individuals and entities with tax years that span both before and after June 25, 2024:
- Separate Reporting for Gains and Losses: Taxpayers will need to separate capital gains and losses realized before June 25, 2024 (Period 1) from those realized after June 25, 2024 (Period 2).
- Threshold Application: The $250,000 threshold will apply only to net capital gains realized in Period 2.
3. Exemptions and Incentives
- Principal Residence Exemption: Remains unchanged, meaning no tax on capital gains from the sale of a primary residence.
- Lifetime Capital Gains Exemption (LCGE):
- New Limit: The LCGE will increase from $1.016 million to $1.25 million, effective June 25, 2024, for qualifying small business shares, farming, and fishing property.
- Eligibility: The new exemption applies to gains on dispositions after June 25, 2024, and will be indexed to inflation starting in 2026.
- Canadian Entrepreneurs’ Incentive:
- New Exemption: A lifetime exemption up to $2 million in eligible capital gains, with an effective one-third inclusion rate.
4. Employee Stock Option Deductions
The inclusion rate changes will also impact stock options:
- Deduction Increase: Employees can claim a one-third deduction for stock options exercised on or after June 25, 2024, for Canadian-controlled private corporations (CCPCs).
- Threshold for Preferential Treatment: If employee stock options and capital gains exceed $250,000, taxpayers can choose how to allocate the preferential treatment between the two.
5. Net Capital Losses
- Carrying Forward and Carrying Back Net Losses: Net capital losses can be carried back three years or forward indefinitely to offset capital gains. Adjustments for the capital gains inclusion rate will apply when offsetting capital gains from different years.
6. Allowable Business Investment Losses (ABILs)
- Deduction Change: The deductible portion of an ABIL will increase from 50% to 66.67% for losses realized on or after June 25, 2024.
7. Partnerships and Trusts
- Transitional Rules for Partnerships: If a partnership has a fiscal period spanning before and after June 25, 2024, its capital gains, losses, and ABILs will be allocated to partners based on the relevant periods. The $250,000 threshold will also apply for each individual partner.
- Trusts: Trusts will need to disclose the breakdown of capital gains based on whether they were realized before or after June 25, 2024. The $250,000 threshold applies to beneficiaries of trusts as well.
This article is posted at wolterskluwer.com
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