As the Government of Canada prepares to present its 2021 budget on April 19, 2021, taxpayers should be aware of how potential increases to the capital gains inclusion rate may affect their tax liability regarding dispositions of capital property.
If the government proposes increases to the capital gains inclusion rate, based on past practice there are generally three ways the Department of Finance could draft the legislation to apply to dispositions of capital property occurring in the 2021 calendar year.
- The legislation may be drafted such that the increased capital gains inclusion rate will apply to all dispositions made on or after the Budget Date with no grandfathering provisions. This would of course be highly unfair to taxpayers.
- To ensure taxpayer fairness, the legislation could instead be drafted such that the increased capital gains inclusion rate will apply to all dispositions made on or after the Budget Date unless the taxpayers have entered into a written purchase and sale agreement prior to the Budget Date.
- As a third alternative, the increased capital gains inclusion rate could apply to all dispositions in taxation years ending after 2021, with some amount of proration applied to the capital gains inclusion rate where a corporate taxpayer has a non-calendar taxation year straddling two calendar years with different inclusion rates.
The Department of Finance has historically used this third alternative. For example, the Department of Finance proposed an increase to the capital gains inclusion rate in its 1987 white paper on tax reform. The 1988 amendments to section 38 of the Income Tax Act (Canada) implementing this increase applied in respect of a taxpayer's taxation year ending after 1987. This provided individuals with ample time from the date of the announcement to December 31, 1987 to arrange their affairs.
Corporate taxpayers with non-calendar taxation years were not given the same opportunity to arrange their affairs. Instead, if a corporate taxpayer's non-calendar taxation year ended after 1987, the capital gains inclusion rate that applied to dispositions made in that taxation year was prorated following a formula based on the number of days in the taxpayer's taxation year falling in the 1987 calendar year.
If the Federal Government increases the capital gains inclusion rate on the budget date, it is possible that the amendments to section 38 will be drafted in a manner similar to the 1988 amendments. Taxpayers, particularly corporate taxpayers with non-calendar taxation years, should be aware of how these amendments may be drafted to affect their tax liability in respect of dispositions of capital property occurring in 2021.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.