NEW CAPITAL GAINS REGIME WE’VE BEEN HERE BEFORE, BUT WHAT CAN BE DONE?

Recently, three key changes to the Canadian income tax laws and regulations were implemented:

·?????? an increase in the capital gain inclusion rate

·?????? an increase in the Alternative Minimum Tax (AMT) rate

·?????? changes to the General Anti-Avoidance Provisions (GAAR)

Needless to say, these changes benefit the CRA, not the taxpayer.? As such, it’s important to make a sober assessment of the potential impact and what measures can be taken to mitigate future taxes payable.? We address the increase in the capital gain inclusion rate here. In posts to follow we will comment on the changes to AMT and GAAR.

Effective from 25 June 2024, the inclusion rate for individuals has increased from 50.0% to 66.7% on capital gains exceeding $250,000 annually. Below $250,000, the inclusion rate remains unchanged at 50.0%.

For corporations and trusts, the new higher inclusion rate applies to all capital gains, with no minimum threshold.

This will particularly impact portfolios with large unrealized gains, family cottages, and investment properties.

This is not new territory for Canada.? The inclusion of capital gains in income has varied over time:? the inclusion rate was set at 66.67% in 1988, then increased to 75% in 1990, followed by the elimination of the $100,000 Lifetime Capital Gains Exemption in 1994. In February 2000, the rate was reduced to 66.67%, which lasted until October 2000, when it dropped back to 50%, and remained there until this budget.? What is entirely new is the concept of a two-tier Capital Gain inclusion formula.???

To mitigate the impact of this increase, tax planning strategies to consider are.

·?????? Gradually realizing gains in your investments portfolios to stay under the $250,000 threshold in any given year.? This could be particularly important to mitigating gains exposure in case of a death, which triggers a deemed disposition of all assets for tax purposes.

·?????? Proactive tax-planning to effect transfers of real estate assets like family cottages and investment real estate to mitigate gains exposure upon death.

·?????? Utilizing the right type of investments within holding companies or trusts.

Despite these changes, capital gains still enjoy more favorable treatment than ordinary income.

Diego Miranda Daniel Martinez, MBA, CFP?, CIM?, FCSI? Jeff Walker Marie Maddex Randy McIntyre Mike Hrabowych Alena Rankin, BBA, CFP? Jerry Tong David Powley

John Gibson Darrell Bartlett CFA, CPA, CA, CIA Andrew Burnett Taylor Howie