Canada’s upcoming increase in its capital gain inclusion rate from one-half to two-thirds, proposed in its latest budget, is predicted to impact a significant cross-section of taxpayers, contrary to the government’s assertion that it will primarily affect the wealthiest individuals and a small minority of businesses.
This proposed shift for dispositions taking place on or after June 25 would apply universally to dispositions by corporations and trusts, with individuals becoming eligible for the higher rate once their realized gains for the year surpass CA$250,000 (roughly $182,000).
Importantly, this change isn’t fertile ground for immediate action, as no such proposal has been incorporated into the budget bill tabled on April 30. Although the government has vowed to introduce the increase via a standalone bill, the act of owning and selling vacation or investment properties—common possessions among Canadians—could become more financially demanding if the raised inclusion rate is finalized.
This wouldn’t be the first substantial impact left by the proposed change, as its repercussions could also reach estates. Should a taxpayer pass away, they’re typically deemed to have disposed of their property at fair market value, with immediate acquisition by the estate. Given Canada’s aging demographic, the altered inclusion rate—which would tax two-thirds of all gains on death exceeding CA$250,000—could put considerable strain on the assets still intact for inheritance, thus imperilling extant estate planning arrangements.
The budget does offer some relief for individual taxpayers and entrepreneurs. It outlines an entrepreneurship incentive that would drop the inclusion rate to 33.3%, applicable to up to CA$2 million of gains over a taxpayer’s lifetime. However, the stringent conditions to access this relief—which exclude numerous types of businesses and require the taxpayer to be a founding investor—mean that it may do little to combat the negative effects of the heightened rate.
The impact on corporations is significant, particularly for the hundreds of thousands of private corporations owned and controlled by Canadian resident individuals. Capital gains realized by these corporations would be subject to the new rate without any possibility of accessing the half inclusion rate on the first CA$250,000 of gains or offsetting incentives. The fiscal burden will inevitably hit the individual shareholders, who could, in turn, see their retirement plans compromised.
A reaction to the proposed increase might be to get rid of capital properties before June 25 to secure the lower inclusion rate under the current regulations. However, in practice, the tight time constraints make this hardly feasible. The outcome of these proposals will become clearer in the coming months when more ‘design details’ are released. This change would necessitate substantial legislative amendments to the Canadian tax system, the impacts of which remain to be determined.
If history serves as any indication, should it be implemented, the increased inclusion rate might not be a permanent fixture in the tax landscape, forcing taxpayers and advisors to remain vigilant across the evolving tax climate.
Disclaimer: This article does not necessarily reflect the opinion of the publisher, Bloomberg Industry Group, Inc., or its owners.
About the Authors: Pooja Mihailovich and Leandra Gupta are tax specialists at Osler, Hoskin & Harcourt, focusing on tax litigation and dispute resolution.