The main takeaway for taxpayers from the government’s new guidance on changes to the tax on capital gains is that Ottawa is sticking to what it had outlined in April’s federal budget, experts say.
In a notice of ways and means tabled on Monday, the government offered more details about how it proposes to apply the new rules, including the handling of trusts and whether individuals would be able to trigger capital gains without pre-emptively selling. But there were few concessions to critics who had sought changes ranging from carveouts to a longer implementation timeline.
“We’re glad to see the government come out with much-needed guidance,” said John Oakey, vice-president of taxation at Chartered Professional Accountants of Canada, which represents the profession at the national level.
But Mr. Oakey said his organization was disappointed that the government will stick to June 25 as the date on which the new tax regime will take effect. With just two weeks to react to the changes, many taxpayers will find it very challenging to rearrange their affairs, he said.
Consider these last-minute planning ideas before capital-gains tax changes arrive
The government had announced in its April budget that it planned to introduce changes to the tax on capital gains, the profit realized when someone sells an asset – such as a property or a stock – for a higher price than what they originally acquired it for, known as the cost basis.
But the government waited until June 10 to publish the details of how the changes would apply.
Currently, only half of capital gains is included in computing a taxpayer’s income. Ottawa wants to raise that proportion to two-thirds. For individuals, however, the higher rate would apply only to annual profits above $250,000, with gains up to that threshold still subject to the one-half rate. The sale of a home designated as a principal residence would remain exempt from capital-gains taxes.
Here are some of the highlights for taxpayers:
The $250,000 threshold will also apply to two types of trusts
The $250,000 exemption doesn’t generally apply to corporations and trusts, but Ottawa announced a small proposed exception for two types of testamentary trusts: graduated rate estates and qualified disability trusts.
The first generally arises after an individual’s death, when their estate – the assets they leave behind – is usually taxed using the same graduated tax rates that would apply to any individual taxpayer for a period of up to three years.
A qualified disability trust, which also takes effect after an individual’s death and is subject to graduated tax rates, can be set up for beneficiaries who live with disabilities and are eligible for the federal disability tax credit.
According to the proposed rules, annual capital gains realized inside a graduated rate estate or a qualified disability trust would be eligible for the $250,000 threshold available to individuals without the need to allocate those profits to a beneficiary in the year.
No option to trigger capital gains pre-emptively without selling
The new guidance from the Department of Finance provides no option for taxpayers to choose to trigger capital gains at the 50-per-cent inclusion rate before June 25 without selling or gifting an asset they own.
“We were hoping that Finance was going to put into the legislation an elective process allowing somebody to, in a sense, tick a box on a form and say they deemed to dispose of that asset, avoiding the necessary selling costs,” Mr. Oakey said.
Generally, such a move would result in a taxpayer paying any taxes on profits realized before the implementation date at the current, lower inclusion rate. At the same time, it would raise the cost basis of the asset, thus likely reducing the tax liability on expected future profits.
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Individuals can’t share the $250,000 threshold with their trust or corporation
The government also made it clear it won’t allow individuals to share the annual $250,000 exemption for which they’re eligible with their trust or corporation, Mr. Oakey said.
Instead, the threshold will apply only to capital gains realized directly by individuals.
