New capital gains tax rules take effect

New tax changes for capital gains are now in effect. The proportion of capital gains that are taxable increases from one-half to two-thirds, starting June 25, 2024. The new rate applies to net capital gains exceeding $250,000 per year for individuals and to all net gains realized by corporations and most types of trusts. 

Shortly after the 2024 federal budget announced these changes on April 16, the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada made recommendations to the Department of Finance on the legislative changes required to enact the budget provisions and several considerations to improve the proposed legislation. 

A Notice of Ways and Means Motion was introduced to the House on June 10 to start the legislative process, although the government says final legislation won’t come until the end of July, a month after the changes take effect. 

The motion introduced on June 10 includes one of the recommendations made by CPA Canada to extend the annual $250,000 capital gain safe harbour to two types of trusts: graduated rate estates and qualified disability trusts. However, the motion does not incorporate some of CPA Canada’s other recommendations.  

For example, the Department of Finance indicated in a backgrounder to the motion that individuals will not be able to share their $250,000 threshold with corporations they own, which will negatively affect the principle of integration between the taxation of individuals earning income directly and those who earn income through a corporation.  

“We’re disappointed that Finance hasn’t accepted our recommendation for individuals to share the $250,000 threshold with their corporations, but we will continue to recommend measures that will support integration in the tax system,” says John Oakey, CPA Canada’s vice-president of tax. 

Some other issues raised by CPA Canada were not addressed in Finance’s backgrounder and remain outstanding, such as grandfathering to ensure the new inclusion rate does not apply to taxpayers who entered into a binding agreement to sell capital property prior to the 2024 budget announcement with closing conditions that prevented a sale before June 25.

Further, several provisions of the Income Tax Act may require amendments or clarifications. For example, the legislation, as drafted, causes complications for certain corporate taxpayers wishing to compute their capital dividend account balance for tax years that straddle June 25, 2024.  We are also hearing from our members about other potential issues in the draft legislation.

CPA Canada also noted that the $250,000 annual threshold was proposed to ensure that middle-class Canadians would not be significantly affected by the changes. As such, CPA Canada recommended that individuals should be permitted to carry forward some unused portion of the $250,000 annual threshold to better match the way this segment of the population often realizes capital gains, and that it be indexed going forward. 

CPA Canada will follow up with Finance in the coming weeks to address these and other considerations it believe should be included in the draft legislation expected in late July.