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June 25th, when the new inclusion rate begins, is fast approaching.However, Ottawa has not yet released full details of the changes.
Published date May 15, 2024 • Last updated 16 hours ago • Reading time 4 minutes
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Significant changes to capital gains taxes were a centerpiece of Prime Minister Justin Trudeau's recent federal budget.Photo by Derek Ruttan/London Free Press/Postmedia Network
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Written by William Robson, Alexandre Rollin, Nicholas Dahir
It has been 29 days since the 2024 Federal Budget announced major changes to capital gains tax. Their core was filled with money-making rhetoric and higher membership rates. Other announcements, framed (without any obvious sense of irony) as supporting risk-taking and investment, include a reduction in the rate of inclusion of some profits for some business owners and agricultural and fishing real estate in Canada. An increase in lifetime capital gains exemptions was promised for owners of and small businesses. The budget said many of these changes, particularly the increased coverage ratios, would come into effect on June 25th.
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There are only 41 days left until June 25th. That timeline is a big issue, and it's getting bigger by the day. All we know for now is the budget announcement. This did not include any legislation, and the budget implementation bill introduced on May 2 did not contain any details. The government expects affected taxpayers to sell many of their assets by June 25th. The government is counting on a one-time $7 billion increase in revenue from the sale (much more than the ongoing yield from the policy change) to improve its budget deficit. This year's debt goal. However, a lack of legislation or clarity on the changes could mean that the government itself does not understand how its announcements will work in practice.
It seems easy to change the rate at which capital gains are included. However, modern taxes are not simple, and the details that are not yet known are important.
For example, the Budget suggests that taxpayers with capital gains who are currently exposed to the withdrawal of old age security and other benefits could find relief under the new system. Currently, taxable capital gains are included in the calculation of net income to determine clawbacks, followed by deductions for prior year capital losses and exemptions for lifetime capital gains. The Budget suggests that prior year loss deductions and lifetime deductions could become part of the net profit calculation. Is that the government's intention? We don't know, and the Canada Revenue Agency may not know either.
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Capital gains inclusion rates interact with other tax provisions. This change could result in more tax liability for charitable donors. Individuals who make charitable contributions from capital gains over $250,000 will have higher taxable income, but their charitable contribution tax credit will remain the same. The taxable income of companies that donate capital gains proceeds will also be higher, but the charitable contribution tax deduction limit will also remain the same. The budget announcement also included changes to the employee stock option deduction to reflect the new inclusion rate. Does the same apply to business investment losses? Perhaps business investment losses have historically been deducted at the capital gains inclusion rate. However, unlike previous changes in the inclusion rate, this is not specified in the budget. Again, we don't know, and the CRA may not know either.
Another complication arises when a trust has a different inclusion rate than many beneficiaries. Assume that the trust realizes the gain before his June 25th date and pays 1/2 interest, but that income flows to a beneficiary subject to his 2/3 interest rate. Or will the trust realize profits at a 2/3 interest rate, but the beneficiaries will face a 1/2 interest rate? What charges apply? Does anyone know?
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The bigger question is why the government announced such sweeping changes to the tax system before it understood how they would work. The answer seems to be that this is a pattern of modern politics, and certainly a feature of the current federal government. Announcements such as issues and slogans that attract attention on social media are the main focus of policy makers. Implementation is an afterthought and advice from government officials and external experts is considered a low priority.
Requirements for tax preparers with “bare trust” arrangements, such as joint bank accounts, to file trust returns and for homeowners to report potential unused home tax liability were recently introduced. Consider being withdrawn at the last minute. These reckless efforts created months of anxiety, effort, and cost for tens of thousands of taxpayers, and the government canceled the requirements at the last minute when it realized it faced an enforcement nightmare. Will the same thing happen with capital gains tax changes?
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The problem with these proposals is not just their early deadlines and lack of rules. Retroactive taxes on accrued profits send a dire signal to savers and investors, especially after an outbreak of inflation. The federal government has become even more hostile to wealth creation. The best course of action to avoid immediate pain and lasting financial damage may be to abandon the proposal.
If another walkback is imminent, the time is now, not June 25th.
William Robson is CEO of the CD Howe Institute, Alexandre Rollin is Director of Research, and Nicholas Dahir is Director of Research.
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