How the New Capital Gains Tax Changes Will Impact Your Business: Key Insights from an Accounting Firm

As an accounting firm, we understand that navigating tax changes can be overwhelming for individuals, businesses, and trusts. With the new capital gains tax rules set to take effect in Canada on June 25, 2024, it’s important to understand how these changes could impact your financial planning, tax strategies, and overall tax liabilities.

In this blog post, we’ll provide an overview of the upcoming changes and explain what they mean for you and your business. We’ll also share insights from the recent recommendations made by CPA Canada to the government, highlighting areas where further clarifications are needed.

What Are the New Capital Gains Tax Changes?

The most significant change is that starting on June 25, 2024, the proportion of capital gains that are taxable will increase from 50% to 66.67%. This means that two-thirds of the gains on investments or capital property will now be subject to tax. These new rules apply to net capital gains exceeding $250,000 annually for individuals, and to all net gains realized by corporations and most types of trusts.

As your accounting firm, we’re here to help you plan for these changes and minimize the impact on your financial situation.

CPA Canada’s Recommendations: What’s Been Accepted and What’s Still Pending

In response to the government’s budget proposal, CPA Canada, in collaboration with the Canadian Bar Association’s Joint Committee on Taxation, made several recommendations to help smooth the transition to these new tax rules. Here are some key takeaways:

  1. Trusts Benefit from Safe Harbour Extension: CPA Canada successfully recommended extending the $250,000 capital gains safe harbour to two specific types of trusts—graduated rate estates and qualified disability trusts. This is a welcome change for many of our clients who may be trustees or beneficiaries of such trusts.
  2. Corporations Left Out: Unfortunately, the government has not allowed individuals to share their $250,000 threshold with corporations they own. This decision has raised concerns about integration within the tax system, as it creates a divide between how individuals and corporations are taxed on capital gains. We at Kemp Harvey believe this will negatively affect many of our clients who own businesses structured through corporations. We will work with you to explore options to mitigate this effect.
  3. Grandfathering Provisions Needed: Another critical recommendation from CPA Canada that has yet to be addressed is the request for grandfathering provisions. Without these, taxpayers who entered into binding agreements to sell capital property before the 2024 budget may face unexpected tax liabilities. If this applies to you, it’s essential to review your agreements to determine if the new rules could impact your sale.

The Impact on Your Business: What You Should Know

As your trusted advisors, we want to ensure you’re fully prepared for how these changes will affect your tax planning, especially if you own a business or have significant investments. Here are some key areas we’re watching closely:

  1. Integration Issues: The inability to share the $250,000 threshold between individuals and their corporations can result in higher taxes for those with income split between personal and corporate entities. As we review your financial structure, we’ll identify areas where restructuring may help mitigate these tax increases.
  2. Income Tax Act Clarifications: CPA Canada has also highlighted several sections of the Income Tax Act that will need to be amended or clarified to avoid unintended tax consequences. For example, corporate taxpayers who need to calculate their capital dividend account balance for tax years that straddle June 25, 2024, could face complications. Our team will stay on top of any legislative updates to ensure your tax filings are accurate.
  3. Potential to Carry Forward Unused Capital Gains Threshold: CPA Canada has proposed allowing individuals to carry forward unused portions of their $250,000 capital gain threshold. This would be particularly beneficial for middle-class Canadians who may not realize large gains every year. While this provision hasn’t been adopted yet, we will continue to monitor for updates.
  4. Indexing the Threshold to Inflation: With inflation on the rise, it’s crucial to protect the value of the $250,000 threshold over time. Indexing the threshold to inflation would ensure that taxpayers are not unfairly impacted by rising costs of living. This is another area where we support CPA Canada’s recommendation and hope to see action from the government.

How Kemp Harvey Can Help You Prepare

As your accounting firm, we understand that tax changes like these can be stressful, but we are here to guide you every step of the way. Our goal is to ensure that you are not caught off guard by these new rules and that your tax strategy is optimized to minimize your liability. Here’s how we can help:

  • Tax Planning and Strategy: With the new capital gains tax rules, you’ll want to revisit your overall tax strategy. Whether you’re an individual with large investment holdings or a corporation managing capital assets, we’ll help you develop a plan that takes full advantage of any available tax breaks while complying with the new regulations.
  • Restructuring: For clients who own businesses or corporations, we’ll explore options for restructuring income flows or ownership structures to minimize the impact of the capital gains tax changes. This could include reviewing dividend strategies or reorganizing assets.
  • Monitoring Legislative Updates: The government has indicated that further clarifications on these new rules will be forthcoming, particularly around issues that impact trusts and corporate taxpayers. We will continue to monitor these updates and provide you with timely advice on any changes that may affect your tax planning.

Conclusion

The upcoming changes to Canada’s capital gains tax laws will have far-reaching effects on both individuals and corporations. While some recommendations from CPA Canada have been adopted, several key issues remain unresolved, and we will continue to advocate for solutions that benefit our clients.

As always, we’re here to help you navigate these changes and ensure that you’re well-prepared. Whether you need advice on how the new rules impact your corporation, or you’re looking for ways to optimize your personal tax strategy, your local Kemp Harvey office is ready to assist.

If you have any questions about how the new capital gains tax rules will impact your situation, don’t hesitate to reach out to us today for a consultation.

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