Wealth Strategies: New Capital Gains Inclusion Rate May Benefit Asset Sales

With the new the capital gains inclusion rate (CGIR) having increased to two-thirds from half, many taxpayers and corporations will obviously feel the effects.

Despite initial reactions to the new CGIR effective June 25, 2024, you may actually be able to use the $250,000 threshold (applicable to individuals and certain trusts) to your benefit in the case of an asset sale.

In an asset sale, taxpayers who don’t receive all the proceeds during the year of sale may defer the tax associated with the gain over as many as five years (10 years for certain property) using the capital gains reserve. Generally, taxpayers must claim at least 20% (10% in some instances) of the gain annually during that period.

The amount actually paid to the seller must be claimed in a year, so the seller can claim the reserve only if the terms of the sale include a deferred payment. The new CGIR rules allow taxpayers with a reserve to access the annual $250,000 threshold for individuals.

Take for example, a client transfers a family cottage to a child in exchange for a promissory note. They would then be able to spread the inclusion of the gain over five years.

Depending on the size of the capital gain associated with the disposition, claiming a reserve over multiple years might allow the taxpayer to stay below the $250,000 threshold for each year and allow them to apply the lower 50% inclusion rate.

If the cottage were gifted to the child, the client would be deemed to sell the property at fair market value and couldn’t claim a reserve on the associated gain. By introducing a demand loan or promissory note however, the property is sold but all the proceeds aren’t normally collected at once. This is what allows the capital gain to be spread out over time and therefore avoid the new CGIR.

To claim a reserve, a taxpayer must calculate the capital gain for the year as the proceeds of disposition minus the adjusted cost base. You then deduct the amount of the reserve for the year, leaving the portion of the capital gain that the taxpayer must report in the year of disposition.

Bearing in mind the above, one can definitely time and plan such an asset sale with the assistance of qualified professionals, taking into account other financial transactions that may impact the CGIR.

 

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