Uncertainty Remains Around New Capital Gains Rules

The year 2024 is a transitional year as several tax rule changes occurred. One of the rule changes is the increase in the capital gains inclusion rate from 50% to 66.6%. The federal government announced the draft legislation in April, and the change was effective on transactions from June 25, 2024. That is a very short time frame. It created significant property sales and investments between the April and June periods as taxpayers rushed to benefit from the lower inclusion rate.

Entrepreneurs, investors, and other stakeholders opposed the rule change. They called for the government to either reverse it or delay the effective date, giving business owners and individuals time to prepare for the change. Opposition from stakeholders and the delays in parliament decisions progress relatively slowly, creating uncertainty about the new rules.

Uncertainty Around the New Capital Gains Rules

The rules were announced in the 2024 federal budget. After the short consultation period, the Department of Finance published a Notice of Ways and Means Motion on September 23, 2024, to move quickly on the legislation. However, the draft legislation has to be included in a bill and pass three readings in both the House and the Senate before it can receive Royal Assent and be enacted into law.

For the legislation to work, it has first to become a law. Then, the Canada Revenue Agency (CRA) has to publish tax forms, update its assessment program, and determine how it would handle interest and penalties for non-compliance. With uncertainty in the Parliament, it is unclear if taxpayers should even consider the proposed changes when planning or filing tax returns.

Taxpayers cannot file a return with the new rules because the CRA has not released the new forms to report or submit extra capital gains tax. There is no mechanism in place. The CRA has indicated that its systems should be adjusted to account for the new inclusion rate by the end of this year or early 2025, but there is no update so far.

Tax preparers have been instructed not to manually adjust tax return calculations to account for the new capital gains measures.

The New Capital Gain Rule

All this confusion around the new rule surely builds excitement about these rules and why they are so important.

For years, capital gains were taxed at 50% of the total gains. If you sold a property you bought for $400,000 for $1 million, you have realized a capital gain of $600,000. You can include 50% of this gain ($300,000) in your taxable income and pay the applicable tax rate, which may range from 20%-53%, depending on other income and province you belong. The tax liability on $300,000 could range from $60,000 (20% tax rate) to $159,000 (53% tax rate).

The new rule increased the inclusion rate to 66.6% on any gain realized on or after June 25, 2024. For individuals, the 50% rate applies on the first $250,000 gain and 66.6% on any gain above that. This $250,000 threshold will apply every year. However, businesses and trusts must include 66.6% of the capital gain from the $1 gain realized. This rule change made it beneficial for individuals to own assets.  

This means an individual must include $358,100 instead of $300,000 in the taxable income. The first $250,000 gain would add $125,000 (50%), and the remaining $350,000 would add $233,100 (66.6%) to the taxable income. The higher inclusion rate will increase your tax liability by $11,620 to $30,793. While this is bad for those who realize capital gains, it is good news for those who realize capital losses.

The June 25 date divides the tax year into (January 1 – June 24) and (June 25 – December 31). 

What’s Your 2024 Tax Liability

The above is just the tip of the complexity of the rule change. Stakeholders have to make changes to their estate and tax planning. Individuals who took insurance coverage to match the tax liability of their estate will have to update their coverage. Capital gains are not the only tax liability. Alternative Minimum Tax (AMT) is particularly relevant for 2024. The AMT has a complex tax calculation and includes various income and credits; one such income is capital gain.

The CRA states that the taxpayer has to pay the AMT or standard tax calculation, whichever is higher. If you have multiple sources of income, you need not worry. However, suppose you don’t have other income sources and realized a one-off capital gain because of the June 25 rule change. In that case, you might have to check your AMT, which takes 100% capital gain inclusion when calculating liability. 

What Should Taxpayers Do About the Capital Gain Rule Change?

The ambiguity around the rule change has made an already complex tax system more complicated. The next few months would define the tax liability. Whatever the CRA decides, taxpayers will have to implement it fast. It is better to seek the assistance of a tax professional as they are constantly following up with the CRA updates and organizing their client’s taxes for any scenario.

Contact KSSP Partners LLP in Markham and the GTA for Tax Planning Advice

A skilled tax advisor can help you plan and file your taxes and adjust the returns with the rule changes to stay compliant with the tax laws. At KSSP Partners LLP, our tax experts can provide services to support your tax and estate planning function, whether you need partial or complete support. To learn more about how KSSP Partners LLP can provide you with tax and estate planning expertise, contact us online or by telephone at 289-554-5997.