Capital Gains

Overview

Budget 2024 proposes to increase the capital gains inclusion rate from one-half to (i) two-thirds for all capital gains realized by corporations and trusts and (ii) two-thirds for the portion of capital gains realized by an individual in excess of an annual $250,000 threshold, in each case for capital gains realized on or after June 25, 2024. Corresponding changes are also proposed to the capital loss inclusion rate for capital losses realized on or after June 25, 2024.

Consequential to the change in the capital gains inclusion rate, Budget 2024 proposes to reduce the stock option deduction that is available upon the exercise of employee stock options to one-third (from one-half). Individuals would be entitled to a deduction of one-half of the taxable benefit realized upon the exercise of an employee stock option up to a combined limit of $250,000 for both employee stock options and capital gains.

Who will this affect?

The increase in the capital gains inclusion rate will result in many individuals, corporations and trusts, including high-net-worth individuals and Canadian-controlled private corporations, paying more in capital gains taxes. In particular, the increase in the capital gains inclusion rate may make it less efficient for individuals to realize capital gains through a Canadian-controlled private corporation instead of directly. 

Key features

Unlike the application of the proposed capital gains inclusion rate to individuals, Budget 2024 did not contain an annual threshold for the new inclusion rate to apply to capital gains realized by corporations or trusts.  As a result, any capital gains realized by a corporation or trust on or after June 25, 2024, will be subject to the new inclusion rate.

For individuals, the portion of capital gains realized on or after June 25, 2024, in excess of an annual $250,000 threshold will be subject to the two-thirds inclusion rate.  The $250,000 threshold would effectively apply to capital gains realized by an individual, either directly or indirectly through a partnership or trust, net of (i) any current-year capital losses; (ii) capital losses of other years applied to reduce current-year capital gains; and (iii) capital gains for which the lifetime capital gains exemption, the proposed employee ownership trust exemption or the proposed Canadian Entrepreneurs’ Incentive is claimed.

Budget 2024 noted that net capital losses of prior years would continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the capital gains being offset. As a result, a capital loss realized prior to the change in inclusion rate would fully offset an equivalent capital gain realized after the change in the inclusion rate.

For taxation years that begin before and end on or after June 25, 2024, two different inclusion rates would apply. As a result, transitional rules are proposed to separately identify capital gains and losses realized before June 25, 2024, (Period 1) and those realized on or after June 25, 2024 (Period 2). For example, taxpayers would be subject to the higher inclusion rate for the portion of their net gains arising in Period 2 that exceeds the $250,000 threshold, to the extent that these net gains are not offset by a net loss incurred in Period 1 or any other taxation years. Under the transition rules for individuals, the annual $250,000 threshold would not be prorated in 2024 and would apply only for net capital gains realized in Period 2. Budget 2024 did not indicate whether the $250,000 threshold would be indexed to inflation.

Finally, Budget 2024 notes that the federal government intends to make other consequential amendments to the Tax Act to reflect the new capital gains inclusion rate and that additional design details would be provided at an unspecified later date.

How we can help

Taxpayers, including individuals, corporations and trusts, will need to carefully consider the impact of the proposed increase in the capital gains inclusion rate and the proposed transitional rules to them, having regard to their circumstances.  Careful consideration of these proposed amendments and the transitional rules will be required and taxpayers may, in certain circumstances, consider realizing capital gains before June 25, 2024. Our team of tax lawyers can assist you in understanding, and planning for, the impact of these new rules.