Canadians are rushing to get their financial affairs in order as changes to how capital gains are taxed are set to take effect on June 25. The changes will increase the inclusion rate for taxable capital gains from 50 to 67 percent for individuals realizing more than $250,000 in capital gains annually. These changes have been met with opposition from various groups, such as business organizations and doctors. The proposal was first introduced in Budget 2024 in April, but more details on the changes were only made clear on June 10 when the Liberals put a motion to implement them up for a vote in the House of Commons, which was approved.
Accountants have seen an influx of clients in the last couple of weeks as individuals scramble to make transactions before the June 25 deadline. Many CPAs and lawyers have been working tirelessly to help clients determine if they want to engage in tax planning before the changes go into effect. Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth, mentioned that he personally had been involved in numerous client meetings and presentations on this topic in the past week. Some individuals are even trying to close transactions on the sale of private companies or real estate before the deadline to take advantage of the current inclusion rate of 50 percent.
Under the new changes, the inclusion rate for capital gains will rise to 67 percent from 50 percent for profits realized above $250,000 annually for individuals. This will apply to gains made by corporations and many trusts as well. However, Canadians’ principal residences will remain exempt from capital gains taxes. The government has stated that this change will only affect a very small percentage of Canadians, predominantly wealthy individuals. Despite this, there is concern that the measures may impact more individuals than originally proposed due to the unique nature of capital gains realization.
With these changes, there is a new $250,000 annual threshold to ensure individuals earning modest capital gains can still benefit from the current 50 percent inclusion rate. However, investors are now considering various strategies to minimize the impact of the increased inclusion rate. This includes realizing gains at the end of the year by selling winners in their portfolios to stay under the $250,000 gain threshold. Additionally, individuals may also consider estate planning strategies to start realizing capital gains on an annual basis as they age, to avoid facing a large tax burden upon death. There is also anticipation of technical errors and unintended consequences once the changes are implemented, due to the complexity of the Income Tax Act.
It is estimated that only 0.13 percent of Canadians will be affected by the changes to the capital gains tax inclusion rate. However, there is concern that the impact may be greater than anticipated, as many individuals who realize large capital gains do so as a one-time event each year. The system is expected to become more complex with these changes, and there may be challenges in ensuring compliance. Overall, individuals and businesses are taking proactive steps to navigate these changes and minimize the impact on their financial situations.
