What you need to know as changes to Canada’s capital gains tax remain in legal limbo

What are the proposed changes to the capital gains tax?

The gross profit inclusion rate will change for profits earned on or after June 25, 2024. Instead of the half capital gain (50%) rate applied since 2000, exempting part of the capital gain from tax, the following may apply:

• Individuals: The half inclusion rate will continue to apply to the first $250,000 of capital gains in one year. Capital gains exceeding $250,000 in one year will be less than two-thirds (66.67%) (of the portion above $250,000), and only one-third will be tax-free.
• Companies: All capital gains will be subject to the two-thirds inclusion rate, and only one-third will be tax-free.
• Prospects: All taxable capital gains in the trust will be subject to a two-thirds coverage ratio, one-third being tax-exempt. The exemption will apply to graduated unit trusts and qualified disability trusts, which would have the same $250,000 exemption as individuals.

What does the legal process involve?

The federal government has released a notice of ways and means of submission on June 10 to amend the Income Tax Act and explain the change in capital gains tax. The proposal was passed, but the amendment has yet to be formally signed into law. The next notice of ways and means and proposal containing a draft version of the bill was presented on September 23 but has not yet been passed.

There have been two votes of no confidence in the Liberals initiated by the Conservatives this fall, aimed at setting up federal elections. Another option the prime minister may choose is to prorogue parliament to temporarily relieve political pressure. This will effectively suspend parliament, and house committees will have to be reconstituted. Legislative changes, such as the amendment of the capital gains tax rate in the Income Tax Act, may continue to be delayed.

If there is an election before the tax reform becomes law, there is at least a chance that it will not happen.

What does this mean for big profits in 2024 and beyond?

It is possible that those who chose to sell investments before June 25 in order to get a big profit at a lower tax rate will have done so unnecessarily. They may end up paying taxes that they had deferred by not selling in the first place.

Those selling real estate in a hurry may be especially disappointed. The short selling period may have resulted in sellers accepting lower prices to close before June 25. Many buyers knew this and bid accordingly in an already weak housing market.

If the change in the rate of inclusion of capital gains does not pass and the Conservatives are elected, it seems unlikely that they will continue the change after voting against the notice of ways and means of doing it twice. But anything is possible.

Tax planning in uncertain times

Tax planning can be difficult even when the rules are clear. When laws change and it depends on the government being able to pass a new law, there is always a chance for the taxpayer to act prematurely. Sometimes, the consultation period of a tax reform can even lead the government to reconsider the amendment or delay it.