Understanding the CRA's Capital Gains Changes & Their Impact on Your Business
Givens LLP | Sept 27 2024
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The Canada Revenue Agency (CRA) has recently announced changes to the capital gains tax, igniting significant discussions among business owners, investors, and tax professionals. The most striking of these changes is the increase in the capital gains inclusion rate, a shift that holds substantial implications for those who own or invest in businesses.
What Are Capital Gains?
Before diving into the recent changes, it’s important to grasp the basics of capital gains and how they’re taxed in Canada. Capital gains occur when you sell a capital asset—such as stocks, bonds, or property—for more than what you initially paid, including any related acquisition expenses. The difference between the adjusted cost base and the original purchase price is your capital gain. In Canada, only a portion of this gain is taxable, and this is where the capital gains inclusion rate comes into play.
The Capital Gains Inclusion Rate
The capital gains inclusion rate determines the percentage of your capital gain that is subject to tax. Since 2000, Canada’s inclusion rate has been set at 50%, meaning that if you realized a $100,000 capital gain, only $50,000 would be taxed at your marginal tax rate.
Recent Changes to the Inclusion Rate
In April, the Finance Minister announced a significant change to the CRA’s approach to capital gains, specifically an increase in the capital gains inclusion rate. As of June 25, 2024, the inclusion rate has risen from 50% to 66.67%.
This increase means that instead of 50% of your capital gains being taxable, now 66.67% will be. For example, with a $100,000 gain, $66,670 will now be subject to tax, substantially increasing your tax liability.
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How Will These Changes Impact Your Business?
1. Increased Tax Burden on Business Sales
If you’re considering selling your business, the higher inclusion rate could significantly impact the after-tax proceeds from the sale. With a larger portion of the sale proceeds now subject to tax, the net amount you take home could be tens of thousands of dollars less, potentially affecting your retirement plans or reinvestment strategies.
2. Impact on Investment in Businesses
The higher inclusion rate also affects individuals who invest in businesses. Many investors count on the favorable tax treatment of capital gains to justify the risks associated with investing in new or growing companies. A higher inclusion rate reduces the after-tax return on these investments, potentially making business investments less attractive compared to other asset classes.
The inclusion rate will increase to two thirds for capital gains returned by corporations. Individuals will only pay tax on 50% of any capital gains up to $250,000/year.
3. Effects on Estate Planning
For business owners, the inclusion rate increase could complicate estate planning strategies. Passing a business to the next generation often involves significant capital gains taxes. A higher inclusion rate could mean that heirs face a larger tax burden, which might force them to sell part of the business or take on debt to cover the liability. To mitigate this risk, you may need to revisit your estate plans and explore strategies like family trusts, estate freezes, or insurance policies to manage potential tax liabilities.
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Work with Experienced Tax Professionals for Capital Gains Changes
The CRA’s increase to the capital gains inclusion rate marks a significant shift in tax policy that could have widespread effects on business owners and investors. This increased tax burden may influence your decisions about selling a business, investing in new ventures, and estate planning. By understanding these changes and planning proactively, you can mitigate some of the potential negative impacts on your business and personal finances.
While they won’t affect every business, some organizations can be strongly affected by the changes to capital gains. If you think your business will be impacted, we strongly recommend consulting with a tax professional to understand how these changes specifically affect your situation and to develop strategies that align with your financial goals. Contact Givens LLP today for expert advice and support.
