Capital Gains Inclusion Rules Tabled June 10, 2024

Evelyn Jacks & Vincent Crosby

A detailed Notice of Ways and Means Motion (NWMM) outlining important changes to the Canadian tax system were introduced in the two weeks before the existing rules on capital gains inclusion end on June 24, 2024. The capital gains inclusion rate will be raised to 66 23% for corporations and trusts, as well as individuals with capital gains over $250,000, on or after June 25, 2024 if this NWMM passes into law.  The complexity it brings to tax filing in 2024 and future years, is evident in this draft legislation. For even more detail, subscribe to KBR and download our Special Report on Capital Gains Inclusion Rules.

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The legalese is complex legalese making it quite difficult for laypeople, any professional who don’t have a history with capital gains provisions, and the MPs who are expected to, will vote on this within the week – to decipher the broad impact this will have on Canadian asset holders. In addition, updated draft legislation that contains further technical changes will come at the end of July 2024. According to the government these additional changes “will not materially affect the design of or introduce new features to the measure.”

The Calculations of the Capital Gain or Loss

Individuals.  It is proposed that the total income calculation of capital gains (or losses) will be at the 66 2/3% rates for everyone.  After this a reduction would be calculated for a 50% inclusion rate for

Capital gains up to  $250,000 in the tax year

1. Amounts brought into income as a reserve from prior year transactions
2. Amounts previously allocatied by a partnership or trust
3. The above net of capital losses for the current year

and would be determined net of any capital losses for the current year.

Each individual who incurs capital gains on the disposition of property jointly owned by multiple individuals, will enjoy access to their own $250,000 threshold.

The deductions for the following provisions, based on taxable capital gains after the inclusion rate is applied, would be reduced by any gains included at a 50% rate:

• net capital losses
• Lifetime Capital Gains Exemption (LCGE)
• the proposed Employee Ownership Trust Tax Exemption
• the proposed Canadian Entrepreneurs' Incentive

These deductions, therefore would be available consistently in respect of capital gains regardless of the inclusion rate used.

Net Capital Loss Rules.

Net capital losses are deductible against current year taxable capital gains, they  may be carried back three years and forward indefinitely to offset capital gains of other years.  Form T1A is used for the purposes of the carry back.  This form also calculates any available carry forward.

The value of these net capital losses must be adjusted to reflect the inclusion rate of the capital gains being offset. The amounts are grossed up or down to years in which there are different inclusion rates.  The following adjusting factors would apply:

However, the calculations will be more complex in 2024, when there are two periods to consider:

1. Period 1 - identify capital gains and losses realized before June 25, 2024
   • Net out the capital gains and losses from this period
2. Period 2 – identify capital gains and losses realized on or after June 25, 2024
   • Net out the capital gains and losses from this period
   • Apply the 66 2/3% rate to net gains arising in Period 2 (excluding the portion that does not exceed the $250,000 threshold), to the extent that these net gains are not offset by a net loss incurred in Period 1.

The annual $250,000 threshold for individuals would be fully available in 2024 (i.e., it would not be prorated) and would apply only in respect of net capital gains realized in Period 2 less any net capital loss from Period 1.

Trusts.  Only Graduated Rate Estates (GREs) and Qualified Disability Trusts (QDT) would be eligible for the $250,000 threshold available to individuals for capital gains that are not allocated to a beneficiary in the year, thereby providing the same progressive personal income tax rates.  Other trusts would not qualify for the $250,000 threshold.

Lifetime Capital Gains Exemption

As of January 1, 2024, the maximum lifetime deduction is $508,418 (i.e., $1,016,836 x the current ½ inclusion rate). Starting on June 25, 2024, the new maximum lifetime deduction would be $833,333 ($1,250,000 × ⅔) reflecting the new basic inclusion rate of two-thirds and the increased lifetime limit of $1.25 million.

For the portion of a qualifying capital gain realized on or after June 25, 2024 included in income at the one half inclusion rate, the amount of the Lifetime Capital Gains Deduction would be reduced to reflect the lower effective inclusion rate on the first $250,000 of capital gains. This allows for the exemption of $1.25 million in eligible gains regardless of the effective rate at which those gains would have otherwise been included in income for the year.

Things are a bit more complicated when several prior years are involved, too.

Example Calculations by the Knowledge Bureau Research Team

Ben is now a retired college instructor who has lived in Calgary since 1992. In 1994 he inherited a parcel of land with two small houses located outside of the Comox Valley. Ben has kept the property and used it as a vacation destination for his family all these years. The fair market value of the property in 1994 was $104,000. Ben accepted an offer from a private buyer for $996,000 with a closing date of August 1^st, 2024, resulting in a capital gain of $892,000. 

Example 1

Capital Gain Calculation:

First $500,000 will be 1/2 inclusion rate.

The balance of $392,000 will be 2/3 inclusion rate.

$500,000 @ ½ = $250,000

$392,000 @ 2/3 = $261,333.33

Total taxable income = $511,333.33

Example 2

Reviewing Ben’s history with the CRA you see in 2020 he had an unused Net Capital Loss of $25,000.

First $500,000 will be 1/2 inclusion rate.

The balance of $392,000 will be 2/3 inclusion rate.

$500,000 @ ½ = $250,000

$392,000 @ 2/3 = $261,333.33

Less:

$25,000 @ 4/3 (conversion from ½ to 2/3 inclusion rate) = $33,333.33

Total taxable income = $478,000.00

Example 3

Reviewing Ben’s history with the CRA you see in 2020 he had an unused Net Capital Loss of $25,000 and a Net Capital Loss in 1991 of $2,500.

First $500,000 will be 1/2 inclusion rate.

The balance of $392,000 will be 2/3 inclusion rate.

$500,000 @ ½ = $250,000

$39,000 @ 2/3 = $261,333.33

Less:

$25,000 @ 4/3 (conversion from ½ to 2/3 inclusion rate) = $33,333.33

$2,500 @ @ 8/9 (conversion from ¾ to 2/3 inclusion rate) = $2,222.22

Total taxable income = $475,777.78