CGIR Rules:  Draft Legislation Released

Evelyn Jacks

The technical details for the significant tax changes arising out of the April 16 Federal Budget regarding changes to the Capital Gains Inclusion Rate (CGIR) that took effect on June 25, 2024 were  finally released on August 12, absent explanatory notes or even a table of contents, although a Backgrounder issued on June 10.  The announcement provides for a brief consultation period with a deadline of September 3.  Join us for a technical course on the matter from an audit defence perspective in our virtual CE Savvy Summit on September 18. In the meantime, a perusal of the legislation has identified significant updates throughout the Income Tax Act.

Four Important Calculations.  Advisors will need to focus on four broad areas in their discussions with clients:

• The calculation of taxable income under new rules that incorporate a rate of 66 2/3% into the disposition of a variety of taxable assets;
• A capital gains reduction of $250,000 for each individual (not to be indexed), but not for trusts,
• Capital gains exemptions which include a new $1.25 Million amount for qualifying farmers, fishers, small business corporations; a Canadian Entrepreneur’s Incentive (which is detailed in a separate document of legislation) and the $10 Million exemption under the new Employee Ownership Trusts.
• Not to be forgotten:The new Alternative Minimum Tax (AMT) rules which will also need to be calculated

Tax Form Changes Required.  The new rules being with dispositions on or after June 25, 2024 and cover a broad band of provisions in the Income Tax Act.   It will be a challenge to incorporate them all into the various compliance forms required to file 2024 tax returns for capital gains provisions which could include:

1. Schedule 3 of the T1
2. T1A Request for Loss Carryback
3. T657 Capital Gains Deduction
4. T664 or T664(Seniors), Election to Report a Capital Gain on Property Owned at End of Feb 22, 1994
5. T691 Alternative Minimum Tax
6. T936 Calculation of Cumulative Net Investment Loss (CNIL)
7. T1135 Foreign Income Verification Statement
8. T1170 Capital Gains on Gifts of Certain Capital Property
9. T2017 Summary of Reserves on Dispositions of Capital Property

A Summary of Provisions Affected.   Changes required to the ITA included in the legislation:

The Capital Gains Inclusion Rate

• Changes to the computation of income
• Changes to an Agreement to issue securities to an employee
• Changes to the capital gains inclusion rate from ½ to 2/3 for the computation of capital gains and losses including business investment losses for the year.The computation is modified to calculate dispositions in the taxation year that includes June 25, 2024.They specifically make reference to dispositions in the first period (January 1 to June 24, 2024) and the second period (January 25, 2024 to December 31, 2024).The formula for the application of losses calculates net capital gains or net losses in the first period (amount A), divided by net capital gains or net capital losses in the second period (amount B) and then divides the result by A divided by B. The capital gains inclusion rate is then calculated for the year as follows:

Use the 2/3 fraction if:

• If the net result is nil.
• When net capital gains in the first period are less than the net capital losses in the second period.
• If the net capital losses in the first period are less than the net capital gains in the second period.

Use the ½ fraction if:

• If the net capital gains from dispositions in the first period exceed the net capital losses in the second period.
• If net capital losses in the first period exceednet capital gains incurred in the second period

Otherwise, technical rules that follow through to other sections of the Act use the 2/3 fraction.  Also of note:

• Deceased taxpayer -  capital losses can be elected to be used on the final return are deemed to have occurred on the date immediately before death.
  • Granting of stock options – the net amount is deemed to be a capital gain from a disposition on the day the option was granted.

Other sections of the ITA impacted by these rules

1. Change in use election
2. Business investment losses and recovery of bad debts
3. Disposition of listed personal property
4. Property with more than one use
5. Capital interest in a trust
6. Debt forgiveness rules
7. Non arm’s length sale of shares
8. Capital Dividend Account
9. Shares corporations not resident in Canada
10. Shares of foreign affiliates
11. Rules for Foreign accrual property income
12. Rules for partnerships and their members including disposition of farmland
13. Rules for trusts and their beneficiaries including disposition of capital interests in a trust
14. Employee stock options- descriptin of the benefit to have been received to include the fraction of 1/3 for qualified securitiesand the charitable donation of employee option securities
15. Prospector’s and grubstaker’s shares
16. Capital gains deduction including extensive calculations for qualified farm or fishing property to reflect the exemption amounts allowed before and after June 25, 2024; the same being true of qualified small business corporation shares pre and post-2024
17. An order for the application of the provisions starting with Sections 110 (deductions permitted), 110.2 (lump sum averaging), 111 (losses deductible), 110.61 ($10 Million exemption on sale of shares on Employee Ownership Trust) and 110.62 (Canadian Entrepreneur’s Incentive) as well as 110.7 Residency in a prescribed zone.Rules have been enacted to ensure that no double deduction can be claimed for capital gains exemptions.
18. Rules applicable to non-residents of Canada and their respective withholding taxes
19. Inflation adjustment rules for the capital gains exemption starting in taxation years beginning after 2025
20. Effect of the rule changes on attribution rules for capital gains earned by minors
21. Calculation of adjusted taxable income under the Minimum Tax
22. Rules for Mortgage Investment Corporations
23. Rules for Mutual Fund Corporations
24. Rules for Insurance Corporations
25. Changes to the Income Tax Regulations – Paragraph 5900, 5901, 5902, 5903, 5905; specifically dividends paid out the hybrid surplus of an affiliate

The Capital Gains Reduction

• Section 38.01 has been added to refer to the $250,000 capital gains reduction that will be allowed to an individual (other than a trust), a graduated rate estate or a qualified disability trust.A special formula will reduce this amount by 6 times certain amounts deducted and then a second formula is applied to strip out capital gains or losses to which the ½ fraction will be applied.