Effective for capital gains realized after June 24, 2024, proposals contained in federal Budget 2024 will (if enacted) increase the capital gains inclusion rate for corporations and trusts to two-thirds from one-half. For individuals, the inclusion rate will increase to two-thirds on the portion of net capital gains earned in the year in excess of a $250,000 threshold, and below that threshold, capital gains will remain subject to the current one-half inclusion rate. This threshold does not apply to corporations or trusts.
Budget 2024 also proposes to make additional amendments to the AMT amendments that were previously announced in Budget 2023.
In a nutshell, AMT is a parallel tax regime that applies to individuals and most trusts, and these taxpayers will pay the higher of their "regular" tax or their AMT. If paying AMT, the difference between the AMT amount and regular tax can be carried-over (ie. recovered) and applied as a credit against regular tax for seven years, so long as the taxpayer has sufficient regular tax to pay.
The key changes to AMT are:
- an increase in the AMT rate to 20.5% (up from 15%);
- the inclusion of 100% of capital gains earned in the year (up from 80%);
- a decrease in the AMT credit for donations to 80% of the regular tax credit (down from 100%).
These changes are causing some confusion and we have identified the following issues based on client situations that we have encountered:
1. Timing of gains for trusts and partnerships:
Trusts and partnerships that have realized capital gains during their fiscal period, allocate these gains to their beneficiaries or partners at the end of the year. It remains unclear whether a capital gain realized by a trust or partnership before June 25, 2024 will be "timestamped" when allocated to the beneficiaries or partners at the end of the year such that it will remain taxable at the one-half inclusion rate or at the two-thirds inclusion rate.
It should be noted that the CBA-CPA Joint Committee on Taxation has made a submission to the Department of Finance that includes a proposal that a capital gain realized by a trust and a partnership be "timestamped" such that a capital gain realized prior to June 25, 2024 be subject to a one-half inclusion rate in the hands of a beneficiary or partner, as the case may be.
2. Capital gains reserves
Where capital gains are realized and there is a balance of sale owing to the vendor, the vendor can claim a "reserve" in order to pay tax on the amount of the gain actually received in the year (subject to certain rules beyond the scope of this article). The reserve amount is then brought back into income by the vendor in the following year. It remains unclear whether reserves brought back into income in subsequent years, for gains realized prior to June 25, 2024, will be included at the one-half inclusion rate or the two-thirds inclusion rate and whether the taxpayer (if an individual) will benefit from a new $250,000 exemption amount each year.
3. Employee stock option 110(1)(d) and (d.1) deduction
Simplified, the deductions under paragraphs 110(1)(d) and (d.1) of the Income Tax Act (Canada), provide employees who have been granted stock options by their employers a 50% deduction against their taxable stock option benefits. Budget 2024 proposes to reduce the 110(1)(d) and (d.1) deduction from one-half to one-third in lockstep with the increase in the capital gains inclusion rate such that the effective inclusion rate of the combined stock option benefit and capital gains on the disposition of the optioned shares equals to roughly two thirds (or slightly less given the $250,000 exemption that will remain taxed at the current one-half inclusion rate). Questions remain as to whether options that are exercised prior to June 25, 2024 will benefit from the one-half deduction where the optioned shares are sold after June 24, 2024.
4. Flow-through Shares AMT impact
As a result of the AMT changes outlined above; namely, the increased capital gains inclusion rate to 100% for AMT purposes, the "flow-through deduction" being subject to the higher AMT rate of 20.5%, up from 15%, and the decrease of the AMT donation credit inclusion rate from 100% to 80%, flow-through share investors may now have an AMT liability.
It is anticipated that detailed transitional rules will be released by the Department of Finance that are likely to address some of these issues.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.