Understanding the 2024 Capital Gains Inclusion Rate Adjustments

Basic Inclusion Rate and $250,000 Threshold for Individuals

As of June 25, 2024, the basic inclusion rate for capital gains and losses will increase from one-half to two-thirds. This change is significant for those who need to plan their finances accordingly. However, there are nuances to consider:

• Individual Exemption: Individuals (excluding most trusts) can be subject to the one-half inclusion rate for capital gains under the $250,000 threshold in a given year. This means the new two-thirds inclusion rate will only apply to gains exceeding this threshold.

The inclusion rate reduction would be available on capital gains realized directly by individuals, including such amounts from capital gains reserves, partnerships and trusts.

For properties jointly owned by multiple individuals, each person's $250,000 threshold will apply separately, potentially reducing the overall tax burden.

Graduated rate estates and qualified disability trusts would also be eligible for the $250,000 threshold available to individuals regarding capital gains not allocated to a beneficiary in the year.

• Consistency in Deductions: Deductions such as the Lifetime Capital Gains Exemption (LCGE) and others are adjusted based on the inclusion rate applied to capital gains. This ensures that the deductions are consistently applied, whether the gains are taxed at the one-half or two-thirds rate.

Net Capital Losses

Net capital losses can be strategically utilized to reduce taxable capital gains by carrying them back or forward to offset gains in other years. The value of these losses would be adjusted to match the inclusion rates of the gains they offset.

• Carryover Periods: Net capital losses may be carried back three years and forward indefinitely to reduce capital gains in other tax years.

• Adjustment for Inclusion Rates: Losses must be adjusted to reflect the inclusion rate of the capital gains they are set to offset. This ensures that a loss from a year with a different inclusion rate still effectively offsets a gain in another year.

Transition Year

Starting June 25, 2024, new rules will apply for the treatment of capital gains and losses due to changes in the basic inclusion rates. These changes require taxpayers to apply different inclusion rates for gains and losses realized before and after this date.

• Capital Gain and Loss Periods: Taxpayers must distinguish between capital gains and losses realized before June 25, 2024, (Period 1) and on or after this date (Period 2).

• Netting Process: Gains and losses within the same period are netted against each other to determine a net gain or loss for that period.

• Inclusion Rates:

• For Period 1: Gains and losses are subject to the one-half inclusion rate applicable before June 25, 2024.

• For Period 2: The higher inclusion rate would apply, except for the portion up to the $250,000 threshold for individuals, which may be offset by any net loss from Period 1.

Capital Gains Reserves

Taxpayers may defer recognizing capital gains on certain transactions, with the actual timing of recognition depending on when payment is received. This deferral mechanism is often referred to as a capital gains reserve.

• Family Transfers: For sales of farm or fishing property or small business shares to a descendant (child, grandchild, great-grandchild), a minimum of 10% of the gain must be recognized annually, allowing up to a ten-year deferral. Bill C-59 proposes extending this ten-year period to intergenerational business transfers and sales to employee ownership trusts.

• Other Capital Property: For other types of capital property, at least 20% of the gain must be included in income each year, permitting a maximum five-year deferral period.

Inclusion Rate Considerations

When a capital gain is brought out of reserve in a subsequent year, it is included in the taxpayer’s income at the inclusion rate applicable for that year. For example, if a reserve is claimed on a gain realized in 2023, any portion of the gain that is brought into income in  2025 would be taxed at the two-thirds inclusion rate unless specific conditions apply (e.g., falling under the $250,000 threshold for individuals, which could reduce the rate to one-half).

Impact of Legislative Changes on Taxation Years Straddling June 25, 2024

For taxation years before and after June 25, 2024, gains brought out of reserve are treated as arising on the first day of the taxpayer’s taxation year. 

Partnerships

Partnerships calculate their income and losses as if they are separate taxpayers, with their partners reporting their respective portions of the income/losses according to the partnership agreement.

Special Rules for Fiscal Periods Straddling June 25, 2024

• Disclosure Requirements: Partnerships must inform partners of the amount of each capital gain, capital loss, and business investment loss realized for each period (i.e. Period 1 or Period 2) in prescribed form.

• $250,000 Capital Gains Threshold: Each individual partner's $250,000 capital gains threshold would apply for the purposes of determining the effective inclusion rate of their capital gains allocated from the partnership.

Trust Designations in Respect of Taxable Capital Gains

Canadian trusts can often designate any part of their net taxable capital gains to their beneficiaries, with the amounts maintaining their character as capital gains in the beneficiaries’ hands.

• For trusts’ tax years starting before June 25, 2024, and ending after June 24, 2024, the amount designated in respect of their net taxable gains are grossed up and deemed to be capital gains realized by beneficiaries in the period that the trust disposed of the relevant capital property.

• Trusts must inform beneficiaries about the portion of capital gains relating to property dispositions in each period. Failure to do so would result in all gains being deemed realized after June 24, 2024.

• Non-personal trusts, like mutual fund trusts, can elect to have the deemed capital gains realized proportionally by investors based on the duration of each period within the taxation year.

• Each individual beneficiary's $250,000 capital gains threshold would apply for the purpose of determining the effective capital gains inclusion rate for capital gains allocated to the individual by the trust.

Non-Resident Dispositions of Taxable Canadian Property

Non-residents of Canada are generally subject to tax on capital gains from the sale of taxable Canadian property, which includes real estate and certain shares. Specific procedures ensure tax collection on these gains, including a withholding requirement.

• Currently, the withholding rate is set at 25% but will increase to 35% to reflect the highest combined federal and provincial tax rates on capital gains.

• This change takes effect for dispositions occurring on or after January 1, 2025.

For more information on the above capital gains inclusion rate, visit the Government of Canada’s website or Crowe MacKay’s 2024 Federal Budget Tax Highlights article.

This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual tax needs. This publication is not a substitute for obtaining personalized advice.

If you are looking for Tax Services, Crowe MacKay provides personalized support. Our tax professionals will help you maximize tax-planning opportunities and ensure the minimum amount required by law is paid.