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Change in Capital Gains Treatment Thumbnail

Change in Capital Gains Treatment

Financial Planning Tax

For those not paying attention to the latest Federal Budget proposal, you will be disappointed to learn that the inclusion rate of a gain on an asset sale has risen from 50% to 66.67%.

This isn’t the first time the inclusion rate has been changed, nor is it the highest rate.

Brief History - inclusion rate for each period in which you made a gain on an asset sale.

  • Before May 23, 1985 1/2 (50%)
  • After May 22, 1985, and before 1988 1/2 (50%)
  • In 1988 and 1989 2/3 (66.6666%)
  • From 1990 to 1999 3/4 (75%)
  • From 2001 to 2023 1/2 (50%)

There is an added twist with this iteration by adding a threshold of $250,000 before the higher rate kicks in. Your inclusion rate remains at 50% up to a $250,000 gain. Gains above that mark are calculated at the 66.67% inclusion rate. This only applies to individuals. Corporations do not get a progressive inclusion scale. 66.68% inclusion rate from first dollar of gain. Add this to passive income treatment inside a Holdco and it’s clearly impacting the decision to set up a Holdco for passive income.

Recently read an article where it was pointed out that the $250,000 threshold isn’t the benefit you might think it is after considering the impact of Alternative Minimum Tax (AMT) rules in effect as of January 1st.  If you have a capital gain of more than $173,000 then you must do an AMT calculation using an inclusion rate of 100 per cent. AMT may or may not apply depending on the size of the gain and your other income.

The last transitional measure to stir us up is the deadline for the inclusion rate change to take effect: all gains triggered before June 25th will have the inclusion rate of 50%. This applies to both individuals and Holdco’s.  The June 25th deadline has stimulated activity, particularly in the real estate investment and cottage market. Understandably so if one is sitting on an unrealized gain with the intention to sell.

While this budget change is supposed to impact the wealthy more than average Canadians, it appears to be catching many of us in its net and will impact retirement and estate planning results. Speak to us about whether triggering gains makes sense in your situation.


Source: - The Global & Mail - April 25, 2024