What You Should Know About The 2024 Changes in Capital Gains Tax

The Canadian government increased the inclusion rate on capital gains tax effective June 25, 2024. It has attracted attention, as everyone from individuals, corporations, and trusts will see an increase in their capital gain tax. These changes will require business owners to review their estate plans and investments in corporations and trusts to reduce the tax bill.

This article will show how these changes will impact individuals and business owners.

The 2024 Changes in Capital Gains Tax

Before June 25, 2024, the Canada Revenue Agency only included 50% of the capital gain in the taxable income of individuals, trusts, and corporations. The new rule has increased the inclusion rate to 66.67% for corporations and most trusts. The 50% inclusion rate for individuals will apply to the first $250,000 capital gain, which will rise to 66.67% for gains exceeding $250,000 annually.

Impact of Changes in Capital Gain Inclusion Rate on Individuals

Individuals can avail themselves of the 50% inclusion rate on the $250,000 capital gains realized directly from the sale of assets or indirectly via a partnership or trust.

These changes do not affect the Principal Residence Exemption, which allows individuals to claim a partial or complete exemption on the capital gain from the sale of their principal residence.

If a property is jointly owned by two individuals, each owner can apply their $250,000 threshold. However, individuals cannot share this threshold with corporations or trusts.

If individuals earn a higher capital gain, they cannot divide it over multiple years. For instance, you cannot divide this gain over five years if you earned a capital gain of $1 million. You have to realize the entire gain and pay tax on $625,000 [$125,000 (25% on the first $250,000) + $500,000 (66.67% on $750,000)].

If you sold your property and received the proceeds in installments before June 25, 2024, the previous capital gain rule of 50% inclusion without any threshold will apply. The changes are for capital gain realized after June 25.

Impact of Changes in Capital Gain Inclusion Rate on Small Business Owners

Investing through Corporations: Many business owners invest in real estate, stocks, and mutual funds through the corporation instead of withdrawing the money and investing in their name. This way, they save on personal income tax and have more money to invest. Moreover, the exempted capital gain is transferred to the Capital Dividend Account (CDA) and distributed to shareholders tax-free.

However, the new capital gain tax inclusion will reduce the advantage of investing through the corporation. For instance, if a corporation earns a capital gain of $100,000 after June 25, 2024, it would pay tax on a $66,670 gain, and only $33,330 will go into CDA. If this gain were realized before June 25, it would have transferred a tax-exempt gain of $50,000 to the CDA account.

Business owners not looking to earn more than $250,000 in capital gain might consider holding their investments directly instead of corporations. They could consult a tax expert to model their investment holding structure in a way that generates maximum tax savings.

Maximize the use of capital losses: The inclusion rate has increased for both capital gain and loss. If business owners have any capital losses, they can use a higher loss rate to offset gains. You could carry forward these losses and reduce the net capital gain, thereby mitigating the impact of higher capital gain inclusion.

Lifetime Capital Gain Exemption (LCGE): The LCGE allows business owners to claim a lifetime exemption on capital gain when they sell their business. The CRA increased the LCGE limit to $1.25 million from June 25, 2024. Since the increased inclusion rate, gains exceeding the LCGE could face higher taxes.

For instance, you sell your business for a capital gain of $5 million. The $1.25 million will be exempted under LCGE, and the remaining $3.75 million gain will be subject to the new inclusion rates. Business owners can consult a tax advisor to structure their business shareholding so that all family members’ LCGE limits can be utilized to reduce the capital gain tax liability.

Estate Freeze: Many small business owners freeze the value of their equity shares by converting them into preference shares to freeze their capital gain liability and arrange for the funds. The increase in the inclusion rate on capital gains above $250,000 will require business owners to calculate their tax liability and arrange for the difference.

Contact DDL & Co. in the Niagara Region to Help You with Estate and Tax Planning

The change in capital gain inclusion has impacted estate planning, tax planning, and investments on various fronts. Avoid making decisions in haste. At DDL & Co., our professional tax advisor can review your plans in light of the recent developments, understand the tax implications, and suggest changes to the holding structure. To learn more about how DDL & Co. can provide you with the best tax and estate planning expertise, contact us online or call us at 905-680-8669.