Advocacy: CPA Canada advises feds on capital gains
The clock is ticking down to a June 25 implementation date for an increase to the capital gains inclusion rate proposed in Budget 2024. The capital gains inclusion rate is set to rise from one-half to two-thirds (for individuals, the first $250,000 a year is excluded).
The Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada (JCT) met with Department of Finance officials to express our immediate concern that the short 10-week implementation period and lack of legislation to outline the rules produces significant uncertainty for taxpayers and their advisers.
As a follow-up to this meeting, the JCT provided a formal submission making the following specific recommendations:
Effective date: A June 25 deadline allows only 10 weeks from the announcement to plan for the increase in the capital gains inclusion rate and to facilitate in-progress transactions. It is insufficient time for many taxpayers. With no draft legislation to follow, transactions during this 10-week period would be executed with an unfair level of uncertainty. The elective process outlined below could help mitigate with this uncertainty. Alternatively, or in addition, the JCT recommends the effective date be moved to January 1, 2025.
Election to realize capital gain: Allow an elective process to trigger capital gains. This move would deem designated assets to be disposed of for (up to) fair market value proceeds prior to June 25, allowing taxpayers to realize capital gains without an actual disposition of assets resulting in a simpler process, minimized costs, and better certainty for all taxpayers.
Grandfathering: If a taxpayer entered into binding agreements to sell capital property prior to the announcement, these agreements may have closing conditions that prevent a sale prior to June 25. The JCT recommends that the new inclusion rate not apply to situations in which a legally binding contract was signed before the budget announcement on April 16.
Legislative amendments required to avoid retroactive effects: The JCT identified several provisions of the Income Tax Act that will require amendments or clarifications to ensure that capital gains realized prior to June 25 are not inadvertently included in income at the higher inclusion rate.
Private corporations and integration: Some Canadian individuals and small business owners indirectly own and operate their businesses through private corporations. In order to align with the government’s policy intent to only include the wealthiest Canadians, the JCT believes it is imperative that the rules be drafted to allow Canadian individuals the ability to share their annual $250,000 threshold with a private corporation of which they are a (direct or indirect) shareholder.
Trusts: The $250,000 threshold granted to individuals was not proposed to be extended to trusts. The inability for trusts to access the threshold will have a negative impact on routine estate planning situations. The JCT recommends that life-interest trusts be able to share the $250,000 threshold with certain individuals, given that these trusts are routinely used by many taxpayers to administer or protect their estates or to help manage assets for disabled beneficiaries.
Carry forward of threshold: The $250,000 annual threshold is proposed to ensure that middle-class Canadians are not significantly impacted by the changes. However, an annual “use-it-or-lose-it” threshold is not well matched to the reality of how this segment of the population often realizes capital gains. The JCT recommends that Canadians be permitted to carry forward some portion of the unused annual threshold and that it be indexed going forward.
Given the urgency of the June 25 deadline, the JCT prioritized the most pressing issues in its submission to the Department of Finance. The JCT will be sending a subsequent submission detailing other considerations it believes should be included in draft legislation.
September 2024 Update
CPA Canada's VP of Tax, John Oakey followed up this submission with a letter to The Honourable Chrystia Freeland advocating on behalf of the profession and the public for more detailed legislation and guidance. It is important members have the clarity and guidance they need to properly implement this revised legislation. CPA Canada continues to bring members’ technical concerns to Department of Finance and advocates on the vital role of accountants.
Read our full submission, as well as other submissions of the JCT, here.
Check out CPA Canada's tax resources here.