Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether the crystallization of an accrued capital gain prior to an increase in the capital gains inclusion rate is subject to GAAR.
Position: The crystallization of an accrued gain, solely as a means of ensuring access to the current inclusion rate, would not, in itself, be subject to GAAR.
Reasons: See below.
XXXXXXXXXX 2024-101601
Daryl Boychuk
April 29, 2024
Dear XXXXXXXXXX:
Re: Crystallization of Capital Gains
We are writing further to your email correspondence of April 24, 2024 in which you asked for our views on the potential application of the general anti-avoidance rule (GAAR) in the circumstances described below.
In your correspondence, you draw our attention to the 2024 Federal Budget (tabled in the House of Commons on April 16, 2024) which proposes to increase the inclusion rate for capital gains realized on or after June 25, 2024 from one-half to two-thirds. You state that many taxpayers holding capital property with accrued gains will be interested in crystallizing those gains, including in non-arm’s length transactions, to ensure that those gains are taxed at the inclusion rate applicable to the period they accrued. Further, you state that crystallization transactions will be a particular focus for taxpayers who anticipate dispositions of capital property on or after June 25, 2024.
Our Comments
We are prepared to provide the following general comments in response to your query. Our comments herein are not intended to confirm the income tax treatment of any particular transaction involving a specific taxpayer. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by the Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.
Generally stated, the GAAR applies to deny the tax benefit of an avoidance transaction that results directly or indirectly either in a misuse of provisions of the Act (or other specified enactments) or an abuse having regard to those provisions read as a whole.
The Fall Economic Statement Implementation Act, 2023 (Bill C-59), which received second reading on March 18, 2024, includes proposed amendments to the GAAR that, if enacted, would apply to transactions that occur on or after January 1, 2024. Among other things, the GAAR amendments provide that an avoidance transaction that is significantly lacking in economic substance will be “an important consideration that tends to indicate” that the transaction results in a misuse or abuse in applying the GAAR. The proposed amendments to the GAAR also contain a non-exclusive list of factors that are relevant in determining if a transaction or series of transactions is significantly lacking in economic substance.
The potential application of the GAAR requires an analysis of all the facts and circumstances relating to a particular situation. Consequently, only a detailed analysis of all the facts would allow us to make a definitive determination as to the application of the GAAR to a particular situation.
That being said, we are cognizant of the fact that the 2024 Federal Budget does not contain any limits on the eligibility of capital gains for the current inclusion rate where such gains are realized prior to June 25, 2024 and that the delay in the implementation of the increased inclusion rate is a deliberate policy choice. In light of this and subject to our comments below, it is our view that where a taxpayer crystallizes an accrued capital gain prior to the increase in the capital gains inclusion rate, the GAAR would generally not apply to redetermine the inclusion rate in respect of the crystallized capital gain.
It is important to note, however, that the crystallization of an accrued capital gain as part of a series of transactions, one of the main purposes of which is to obtain a tax benefit (other than, or in addition to, the taxation of an accrued gain at the current inclusion rate) would not be immune from scrutiny under the GAAR. In particular, we would refer you to our letter dated February 29, 2024 (CRA document 2023-0987941I7), in which we stated that the Income Tax Rulings Directorate would not provide rulings in respect of a series of transactions in which an individual shareholder proposes to engage in non-arm’s length transactions, one of the main purposes of which was to facilitate the extraction of corporate retained earnings other than in the form of a dividend.
We trust the foregoing addresses your concerns.
Yours truly,
Stéphane Prud’homme
Director, Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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