Beware the Tax Traps: June 15, June 21, June 25, and June 30/July 2

And you thought tax season was over!  Three significant tax milestones loom in June and they require immediate attention now that the April 16 budget has increased the capital gains inclusion rate from 50% to 66 2/3% - a move potentially affecting up to 3 million taxpayers over the course of this decade.  It’s historic, because, not since 1988 – 36 years ago- has the capital gains inclusion rate changed.  This is a time for tax and financial advisors to shine, despite the fact that they are forced to advise with a blindfold:  the April 30 Notice of Ways and Means motion did not introduce the legislation for the massive changes to come.  Here’s what you need to consider: 

June 15, 2024.  That’s a tax compliance deadline for unincorporated self-employed taxpayers and for those who have to make a quarterly instalment payment.  Late filings can attract significant penalties and interest.  Remember, those who owe will be charged daily compounding interest rates of 10% in this quarter.  Late filing penalties double if this is the second year of procrastination:  from 5% and 1% per month for up to 12 months and to 10% plus 2% per month for up to 20 months. 

June 21 and 25. Effective for dispositions on or after June 25, 2024, the capital gains inclusion rates will increase from 50% to 66 2/3%.  For corporations and trusts that will be from the first dollar of gains; for individuals this new rate kicks in on gains over $250,000.  However, on security transactions, be aware that the settlement date must be earlier:  June 21 is the Friday before the June 25 capital gains inclusion milestone, before which the 50% inclusion rate still apply for everyone.

June 28/30/July 2.  This is the normal filing deadline for Form RC243 TFSA Return and RC243-Schedule A – Excess TFSA Amounts; it is also the filing due date for Section 216, 217 Returns used to report net rental income from Canadian-source rental income.  Finally (pun intended), it is the date on which final returns must be filed for deceased taxpayer who passed away in the prior year on Dec. 1 to 31 – the requirement is 6 months after death.  Note that June 30, 2024 falls on a Sunday and July 1 is the Monday of the July long weekend.  Therefore filings are due July 2; summer-savvy taxpayers and their advisors will want to file by June 28. Mark  your calendar.

Embellishing on Your Value Proposition.  The government has tried to play down who the expensive  provisions will affect.  In news releases on the matter, it says that 28.5 million Canadians are not expected to have any capital gains income in 2025.  But 3 million people do earn capital gains income in Canada and while most are expected to earn capital gains below the $250,000 annual threshold, they are not immune from these tax increases in the future. 

One Time Future Events Will Be Expensive.  The reality is that a large capital gain is usually a one-time event, occurring for taxpayers who otherwise have low income scenarios in the years before or after.   These tax changes will indeed cost average people significantly more money when they sell cottages, rental properties, taxable financial assets in non-registered accounts, their private family businesses, farms, etc.  The big unknown: With an increasingly large aging population, when will be more taxes raised through a deemed disposition due to death.  One could say these tax changes will affect, grandpa, grandma and those who have decided to pack it in and emigrate out of Canada. In the later case, there is a departure tax to consider.

Small and Medium sized Business will Pay.  Further – and this is a significant number - approximately 12 per cent of Canada's corporations will face the higher inclusion rate on their capital gains on dispositions on or after June 25, 2024.  The government acknowledges that small and medium-sized businesses are an integral engine of Canada’s economy, employing 64 per cent of Canadian workers.  Will this tax increase cut into strategic philanthropy and economic development?  Planning is required.

Doing the Right Things.  The government’s revenue projections show that they are banking on taxpayer behaviors that crystalize the 50% capital gains inclusion rates and pre-pay taxes on their assets on or before June 25.  This may be a bad idea for a variety of reasons, including the new Alternative Minimum Tax. Further, remember that securities trades must be initiated on or before June 21, 2024 to be settled before June 25.

Worse, is the legislative blindfold.  While a 663-page Notice of Ways and Means Motion was tabled on April 30 to introduce the Budget Implementation Act, 2024, No. 1, containing many of the provisions of the April 16 Federal Budget, notably absent are details surrounding the broad-based and controversial capital gains tax increases. 

For tax accountants and financial advisors, the capital gains tax proposals will trigger proactive discussion about selling or crystalizing value to meet a very tight timeframe before increased capital gains taxes arise.   Many of these capital gains provisions impact numerous scenarios, covered in the May 22 CE Savvy Summit. (hotlink). 

Bottom Line:  Before and after June 15, June 21, 25, and July 2, Canadians will require more investment, retirement and estate planning, to explore the tax mitigation options and consider alternative courses of action to offset tax increases with other relieving provisions. Scenarios to consider in planning:

• Principal Residences that are Not Exempt
• Use of prior year Capital Losses
• Retirement planning for Corporate Owner-Managers
• Departure Taxes for Emigrants
• Effect on Intergenerational Business Transfer Rules
• New “layered” Capital Gains Exemptions
• Deemed Dispositions at Death
• Capital Gains Reserves and Replacement Property Rules
• Impact of the new AMT
• The Impact of GAAR

Hope to see you at the virtual May 22 CE Savvy Summit to discuss strategies to share