The Joint Committee comments on design issues for the shift to the 2/3 capital gains inclusion rate

Comments of the Joint Committee on the design issues for implementing the increase in the capital gains inclusion fraction to 2/3 include:

In order to avoid costs, difficulties, uncertainties, or impediments in actually realizing capital gains before June 25, 2024, taxpayers should be permitted to file an election (see s. 110.6(19)) to be deemed to have realized all or a portion of their accrued capital gains before that date.

Alternatively or in addition, and consistent with the change in the inclusion fractions on January 1, 1988 and January 1, 1990, the effective date should be moved to January 1, 2024.

The increased inclusion fraction should not apply to dispositions of property occurring pursuant to legally binding obligations entered into by the taxpayer in writing before April 16, 2024, subject to some limitations.

With a view to avoiding retroactive effects of the increased inclusion fraction:

  • Capital gains reserves from pre-June 25, 2024 dispositions should be brought into income at the ½ rate;
  • The ½ deduction should be maintained for distributions from hybrid surplus generated from pre-June 25, 2024 dispositions (which might entail drafting for a second category of hybrid surplus).
  • Amendments to s. 110(1)(d.1) should include a continuation of the 50% deduction rate for CCPC options exercised prior to June 25, 2024;
  • Capital gains realized by a trust or partnership prior to June 25, 2024 should maintain that time stamp when allocated to beneficiaries or members.

Canadian individuals should be able to share their $250,000 safe harbour with private corporations of which they are direct or indirect shareholders.

Examples of trusts negatively impacted by the $250,000 safe harbour not being accorded to them include graduated rate estates, qualified disability and Henson trusts, and alter ego or joint spousal/partner trusts.

Canadians should be permitted to carry forward unused portions of their $250,000 safe harbour room.

Neal Armstrong. Summary of Joint Committee, “Subject: Federal Budget 2024 – Capital Gains Inclusion Rate,” 1 May 2024 Joint Committee Submission under s. 38(a).