New Capital Gains Rules can get Very Complicated

And, as always, everyone’s situation is different and these new rules can be extremely complex, so please depend on your personal tax advisor before making any decisions. This article is not tax advice, but rather just an alert to situations that may affect you.

As you know, the federal government made changes to the capital gains inclusion rate (CGIR) in the last budget, which changes became effective on June 25. Capital gains are the profit you make when you sell capital property. (In a future article, we will deal with changes this year to the Alternative Minimum Tax and how they affect donations.)

The CGIR was increased from 50% to 67% on all capital gains realized within a corporation, all gains realized within a trust and on any personal gains exceeding $250,000 in one year.

The inclusion rate is the amount on which you are taxed. Personal gains under $250,000 per year remain at the 50% inclusion rate.

The change mid-year presents the first complexity. For trusts and corporations (and personal gains exceeding $250,000) gains realized prior to June 25 must be claimed at the old rate (Period 1), with applicable gains after June 24 claimed at the new rate.

For trusts, this will be particularly complicated if 2024 gains are realized in both Period 1 and Period 2, with the different inclusion rates.

Since a trust is automatically taxed on all of its income at the top marginal rate (rather than at graduated rates like an individual), most trusts allocate their income to their beneficiaries. Flowing out the income and reporting it on a T3 slip for the beneficiary generally means lower taxes, unless the beneficiary also has taxable income exceeding $246,752. That puts the beneficiary in the top tax rate as well.

The CRA published guidance last month saying that trusts can allocate capital gains incurred prior to June 25 using the 50% inclusion rate, on the December 31 year end reporting of the trust.

However, the bad news is that if the reporting of the trust fails to make proper disclosure “in the prescribed form,” of the gains incurred in Period 1, then all gains in the year will be taxed at 67% instead of 50%.

The exceptions to this are graduated rate estates (the first 36 months after a person dies, if all rules are followed) and qualified disability trusts. Both of these pay tax on gains at 50% on the first $250,000 of gains per year.

Investment funds – both trusts and corporations – must decide whether to do a detailed calculation of gains incurred in Period 1 and Period 2, or file an election to have the rate allocated proportionately. The election means that automatically 48% of gains (the percent of days prior to June 25) would be taxed at the 50% inclusion rate and 52% will be subject to the 67% inclusion rate.

Individual investors will include these amounts on their personal income tax return, and may still end up paying only 50%, if their total capital gains in the year are under $250,000.

Simple, right?

This applies to mutual funds, ETFs, private trusts and limited partnerships help outside of RRSPs, RRIFs or other non-taxable accounts.