By now, most people reading this article are aware that on April 16, 2024 Justin Trudeau’s federal government made some pretty significant changes to the taxation of capital gains.
While these changes were primarily targeted at corporations, trusts, and higher net worth individuals, there are a number of implications from a family law standpoint, and we wish to take this opportunity to highlight some of the changes and the corresponding implications for family lawyers to consider:
- The biggest change was the increase in the “inclusion rate” for which capital gains are subject to tax. Previously, that inclusion rate was 50%, such that only 50% of all capital gains were taxable. This inclusion rate has now been increased from 50% to 66.67% thereby increasing the taxation on capital gains although it isn’t quite as straightforward as that. The increased inclusion rate applies to all capital gains within a corporation or trust and to capital gains for individuals in excess of a $250,000 threshold. Capital gains below the $250,000 threshold remain at a 50% inclusion rate.
- The capital gains exemption that is available on the sale of certain Qualified Small Business Corporation Shares and Qualified Farm Property was increased to $1,250,000 for transactions occurring on or after June 25, 2024 with this limit being indexed on an annual basis in the future. The available exemption prior to that date was $1,016,836 in 2024.
- A further exemption has been created for entrepreneurs with this exemption being brought in over a ten-year period. This “Canadian Entrepreneurs’ Incentive” has several conditions and is only available to businesses within certain industries.
Some of the primary implications that we believe will result from the changes noted above include the following:
- The determination of contingent disposition costs became a whole lot more complicated and that is not only related to disposition costs for corporations. Even for cottages and rental properties that are owned by individuals, disposition cost calculations for capital gains that are above $250,000 are going to need to be done with the two separate inclusion rates.
- For shares of corporations or business interests, not only are you dealing with the different potential inclusion rates but also the changing rules with potential exemptions and the Canadian Entrepreneurs’ Incentive.
- There are potentially going to be a significant number of capital gains triggered in 2024 as a result of the government giving taxpayers a window between the announcement of the budget and June 25th to trigger capital gains at the lower 50% inclusion rate. Our office is currently fielding a number of questions from clients to try and take advantage of this opportunity.
- Business valuations and the corresponding contingent disposition costs before April 16, 2024, are theoretically going to be different than using a Date of Separation on or after that date since these changes were not really anticipated.
Unfortunately, nothing with income taxes is ever simple and these new rules create a lot of additional complexities that family lawyers and us as experts, will need to navigate through well into the future.
– Trevor Hood, Partner and President, Valuations
