Tax group asks feds to allow deemed sales ahead of capital gains change

Ahead of Ottawa’s proposed hike in the capital gains inclusion rate (CGIR), which is set to become effective June 25, the federal government should allow Canadians the option of triggering capital gains without having to sell property, says the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada.

Allowing Canadians to file an election to trigger a capital gain would “prevent a mass sell-off and frantic scramble to obtain professional advice and execute transactions before June 25,” said the committee in a May 1 letter to the Department of Finance.

The committee also asked the government to consider delaying the effective date of the CGIR increase to Jan. 1, 2025, either in addition to providing an elective process or as an alternative.

“With no draft legislation to follow, transactions during this 10-week period [between the April 16 budget date and June 25] would be executed with an unfair level of uncertainty,” the committee said.

In the 2024 federal budget, the government proposed increasing the CGIR to two-thirds on capital gains realized in a year above $250,000 by individuals as of June 25. Currently, the CGIR is 50% for all capital gains realized by individuals. For corporations and trusts, the higher inclusion rate will apply to all capital gains realized on or after June 25.

The CGIR changes were not included in budget implementation Bill C-69. Instead, the government indicated it plans to go ahead with the changes in a separate bill.

In its letter, the committee said an elective process would ensure taxpayers had equal opportunity to crystalize gains prior to June 25.

“Some assets cannot be easily liquidated, such as shares in a private company, real estate or unvested stock options,” the committee said. “For assets that can be sold, such as cottages or publicly traded securities, the pressure to close a disposition transaction before June 25 may distort pricing and put downward pressure on values.”

The committee recommended that taxpayers filing an election be allowed to pay the resulting tax liability over a period of time. An election could be filed separately or with the taxpayer’s 2024 income tax return.

Extending the effective date to Jan. 1 would give the government more time to introduce, consult and enact legislation, which in turn would give taxpayers greater certainty when planning their affairs, the committee said. In addition, a Jan. 1 effective date would better align with current financial reporting systems for the reporting of assets, costs and fair market value.

Among the committee’s other recommendations were that:

• binding agreements to sell property, entered into before budget date but set to close afterward, be grandfathered so that the proposed CGIR does not apply;
• the $250,000 “safe harbour” threshold be indexed;
• Canadian individuals be allowed to carry forward unused safe harbour amounts to future years, and that they be able to share their annual safe harbour with a private corporation of which they are a direct or indirect shareholder; and
• graduated rate estates have their own $250,000 safe harbour; qualified disability trusts and Henson trusts have their own safe harbour to be shared with the disabled beneficiary; and alter ego and joint spousal/partner trusts have their own safe harbour to be shared with the settlor.