Some Canadians sold assets based on the hike to the capital gains inclusion rate the Liberals proposed in the 2024 federal budget. The measure has since been scrapped.Justin Tang/The Canadian Press
Many Canadians who rushed to sell assets that had appreciated last year to get ahead of Ottawa’s proposed hike to the capital gains inclusion rate may be worse off financially now that the federal government has abandoned the measure.
Clients who disposed of assets before June 25, 2024, the original effective date for the hike to the inclusion rate, effectively prepaid taxes, incurred professional advisory costs and may have even exposed themselves to the alternative minimum tax (AMT) or the loss of benefits if they reported significant income in 2024 after triggering capital gains early.
“Vast numbers of clients took action before June 25,” says Michael Cadesky, managing partner with Cadesky Tax in Toronto. “It was unprecedented in terms of the level of attention and the amount of time and effort spent going through evaluations for clients.”
Clients who sold assets earlier than they might have otherwise now have less money to redirect toward investing, Mr. Cadesky says.
“People were induced, in a way, to realize capital gains, and once you realize a capital gain, you have to pay taxes,” he says.
In the 2024 federal budget, the government proposed increasing the capital gains inclusion rate to two-thirds for corporations and trusts as well as for individuals with capital gains above an annual threshold of $250,000. The hike in the inclusion rate was to be effective June 25, 10 weeks after the budget announcement.
The federal government stated in the budget documents that it expected to raise an additional $6.9-billion from the change in the first year, more than a third of the $19.4-billion it expected to see over five years.
In a statement sent by e-mail to The Globe and Mail, Finance Department spokesperson Benoit Mayrand said that at the time of the budget, “it was estimated that many individuals, trusts, and corporations would likely realize a greater volume of capital gains prior to June 25, 2024, to avoid the higher capital gains inclusion rate, through a ‘pull forward effect.’”
While many Canadians did trigger gains ahead of June 25, the government’s proposed change didn’t pass into law before Parliament was prorogued on Jan. 6, 2025.
On Jan. 31, the Department of Finance said the implementation date for the capital gains proposal would be deferred to next year. Then, on March 21, Prime Minister Mark Carney said the government would cancel the hike entirely.
“Taxpayers who did nothing ultimately ended up winning,” says Armando Minicucci, partner with Doane Grant Thornton LLP in Mississauga.
Some wealthy clients with access to sophisticated tax advice chose to undertake crystallization transactions, using certain provisions in the Income Tax Act, that gave them the option of deciding at a later date to elect out of realizing a gain, which was useful as the proposed changes didn’t pass.
However, middle-class taxpayers were more likely to sell appreciated assets such as vacation homes before June 25, or to gift the home to the next generation.
“That was the category of folks that was most affected,” says Kevin Burkett, tax partner with Burkett & Co. in Victoria. “If you sold something, be it a stock or a house or whatever, you cannot undo that transaction from a tax perspective.”
Some elderly clients, or those with shortened life expectancies, may have chosen to dispose of assets before June 25 to trigger gains at the one-half inclusion rate rather than risk having their capital property above the threshold amount be subject to the two-thirds inclusion rate on a deemed disposition at their death, which would leave less money for heirs, says Alexandra Spinner, a partner with Crowe Soberman LLP in Toronto.
Now, clients who sold appreciated assets last year with significant gains could find themselves subject to the AMT for 2024, Mr. Cadesky says.
The AMT is a separate method of calculating tax liability meant to ensure taxpayers pay at least a minimum rate of tax. Under changes to the AMT effective last year, 100 per cent of capital gains realized, up from 80 per cent, are included in the calculation of the AMT. The AMT also increased to 20.5 per cent last year, from 15 per cent, and the exemption amount increased to $173,205 in 2024 from $40,000 previously.
Mr. Cadesky says certain people will be affected by the AMT “potentially quite heavily.”
It’s also possible that a retiree who realized significant gains last year after triggering sales before June 25 could lose partial or full access to Old Age Security. For the 2024 taxation year, OAS clawback begins when income exceeds $90,997.
“There are negative consequences [from the capital gain tax reversal], both directly and indirectly,” Mr. Burkett says.
Mr. Mayrand from Finance says data showing whether the federal government saw an increase in the volume of capital gains realized in the period between the April 16 budget and the proposed June 25 implementation date won’t be available from the Canada Revenue Agency until after tax-filing season.