— June 19, 2024 —

Heads-Up Canadian CPAs:

The Federal government released a Notice of Ways and Means Motion to Amend the Income Tax Act and Income Tax Regulations on June 10, 2024. This motion introduces significant changes, particularly increasing the capital gains inclusion rate from 50% to 2/3. Although the legislation has not yet received Royal Assent and may undergo further modifications, it is crucial for Canadian income tax practitioners to understand the potential implications for themselves and their clients. Here’s a preliminary overview of some of the elections and disclosure requirements that may come into play that you should be aware of.

Key Elections to Watch For

  1. Change in Use of Property Election

– Section Reference: 13(7.7)

– Details: Taxpayers who dispose of property under certain conditions may elect an amount in the prescribed form and manner. This election will be pivotal in calculating capital gains for dispositions occurring during the transitional period.

  1. Mutual Fund Corporations Election

– Section Reference: 131(1.7)

– Details: Mutual fund corporations can elect to allocate dividends based on the number of days before and after June 24, 2024. This election is critical for determining the portion of dividends attributable to capital gains from different periods.

  1. Segregated Fund Trusts Election

– Section Reference: 138.1(3.2)

– Details: Segregated fund trusts may elect to allocate gains and losses according to the transitional periods. This ensures accurate reporting and compliance with the new regulations.

New Disclosure Requirements Ahead

  1. Trusts and Estates

– Section Reference: 104(21.4), 104(21.7), 104(21.8)(b)

– Details: Trusts are required to disclose to beneficiaries the amounts of capital gains or losses attributable to dispositions before and after June 24, 2024. This disclosure is essential for accurate beneficiary reporting.

  1. Mutual Fund Corporations

– Section Reference: 131(1.5), 131(1.6)

– Details: Mutual fund corporations must inform shareholders of the portion of dividends related to capital gains realized before June 25, 2024. Without this disclosure, the entire dividend will be considered as post-transitional gains.

  1. Mortgage Investment Corporations

– Section Reference: 130.1(4.2)

– Details: These corporations must disclose to shareholders the portion of dividends related to pre-June 25, 2024 capital gains. Failure to do so will result in the entire dividend being deemed as post-transitional.

  1. Partnerships

– Section Reference: 96(1.72)(f), 96(1.8)

– Details: Partnerships need to provide detailed information to partners regarding the allocation of capital gains and losses for periods before and after June 24, 2024. This information is critical for partners’ income reporting.

Preparing for Change: Practical Considerations

As tax practitioners, anticipating and preparing for change is essential. Here are some practical steps to take:

  1. Evaluate Client Portfolios: If you haven’t already, immediately identify clients who will be affected by the new inclusion rate and the required elections.
  2. Revise Disclosure Procedures: Over the coming summer months, ensure that your firm’s reporting processes are updated to comply with the new disclosure requirements.
  3. Client Communication: In the next few months, proactively inform clients about the upcoming changes and how these might impact their tax situations.

Staying Ahead with AJAG

This initial overview aims to give you a “heads-up” on what you should expect in the coming months should this legislation pass as drafted.  Stay tuned for further details as the legislation progresses and keep informed with AJAG’s continuing education and resources to ensure you and your clients remain well-prepared for these significant changes.

– Explore our course calendar: Click here to explore our comprehensive listing of available and upcoming courses.

– Sign up for our emails: Click here and join our list to receive important updates and be the first to know about new courses, podcasts and blogs – as well as special promotions!