Increase in Canadian Capital Gains Tax – Cross-Border Tax Impact
On April 16th, the Canadian federal government introduced proposals to increase the capital gains tax rate. Effective June 25, 2024, the federal and provincial capital gains tax rate increases approximately 10% from an average of 25% to an average of 35%. Corporations and Trusts see this rate increase on all capital gains realized on or after this date, while individuals see this rate increase on the annual total of capital gains exceeding C$250,000.
Planning Strategies
The tax proposals provide a little over two months for Canadians to plan for this tax rate increase. Canadians with unrealized capital gains should consider the following strategies:
- Realization of existing capital gains before June 25, 2024;
- Completion of in progress or pending transactions before June 25, 2024;
- Review of capital assets with unrealized gains held in trusts or corporations. Strategies to transfer these assets to individual ownership for orderly sales up to the annual C$250,000 limit may result in lower capital gains tax rates;
- Staying the course with unrealized assets held for long-term. A time value of money analysis should be completed comparing paying the tax now at 25% versus delaying and paying 35% later.
- Review of Canadian residency for individuals with unrealized gains (See below)
- Executing strategies such as mining flow through shares before the June 25, 2024 deadline. Some promoters suggest more deals will be available this spring due to anticipated higher interest resulting from these tax changes.
Canadian Versus US Tax Rates
A US citizen or green card holder resident in Canada faces total Canadian, US federal and US Net Investment Income Tax of approximately 39% on capital gains. In comparison, the same individual leaving Canada and becoming a non-resident of Canada in a no personal income tax state such as Nevada or Florida would be subject to total US federal taxes of 24%. This holds true for Canadian citizens as well.
Canada has a departure tax on individuals ceasing Canadian residency, subjecting certain assets to a deemed capital gain based on their fair market value on the date of move. This Canadian departure tax may be lower now where their assets’ value has not yet significantly appreciated compared to years later when they sell and realize the gain. The tax may also be much lower where they leave Canada between now and June 24, 2024.
US Net Investment Income Tax
US citizens and green card holders residing in Canada are also subject to US federal tax on capital gains. Capital assets held one year or longer are subject to a maximum US federal tax rate of 20%. Canadian capital gains taxes can be claimed as a foreign tax credit to reduce or eliminate this US federal capital gains tax.
The US Net Investment Income Tax, at a rate of 3.8%, applies to capital gains for US persons over a certain income threshold. While the Canadian capital gains tax rate exceeds the US long term capital gains tax rate, the excess generally is not allowed to be claimed as a foreign tax credit against the Net Investment Income Tax, potentially leading to a level of double taxation on the gain. However, one recent US Tax Court Case for a US citizen residing in France reached the opposite conclusion with the judge concluding that foreign tax credits were allowed to reduce the US Net Investment Income Tax. A second US Tax Court Case for a US citizen residing in Canada, using similar arguments as this successful case is pending.
The tax changes further increase the spread between US and Canadian capital gains tax rates resulting in more Canadian tax potentially not claimed as a foreign tax credit in the US. A positive result for the taxpayer in these US court cases will help reduce this spread.
Next Steps
While May and June are busy times for tax professionals, we welcome you to contact us anytime to discuss your situation further.
