Capital Gains Exemption And Minimum Tax - Mixed Signals From Ottawa
Authors: Parsons R.B. 
Published: March 2010

The "tax simplification" bandwagon which Ottawa seemed to favour in recent years has suffered a setback. Two significant tax measures tabled by the Minister of Finance in 1985 are clearly contrary to any previous notification from Ottawa that Simplification of the income tax legislaion was acknowledged to be a desirable objective. The legislation to implement the $500.000 capital gains exemption and the minimum tax rules may serve to satisfy political and other whims, but arguably accomplish little else, except to unnecessarily complicate this country's income tax law.

Introduction

The Federal government recently released a number of documents outlining proposed changes to the Income Tax Act. First, on November 26, Bill C-84, the legislation to implement most of the changes announced in the May budget, was introduced in Parliament. At the same time related draft regulations were released. This was followed, on December 2 by a Notice of Ways and Means Motion proposing certain changes in the taxation of flow through shares. On December 4 the government released its minimum personal income tax proposals. Certain anti-avoidance provisions dealing with the wind-up of partnerships and pension fund investments were also outlined at that time.

The changes of broadest interest are the $500,000 capital gains exemption, and the imposition of a minimum income tax.

The capital gains exemption will be available to Canadian resident individuals for 1985 and subsequent years in the amounts originally proposed. However, a number of complex anti-avoidance rules are proposed in an attempt to ensure that the exemption is not abused.

The minimum tax provisions impose an alternate tax of about 25% on income computed using a modified definition which eliminates a number of the deductions, exemptions and tax credits currently available. Individuals and trusts would pay the greater of the minimum tax and the regular tax.

The new legislation is lengthy and complex and will profoundly affect the future tax planning of Canadians. Many traditional methods of personal income tax minimization will no longer be possible or effective. The rules of the game have changed and future planning should be undertaken cautiously.

Capital Gains Exemption

As proposed in the budget, net capital gains realized by individuals resident in Canada throughout the taxation year will be exempt up to a lifetime limit of $500,000 ($250,000 of taxable capital gains).

The discretionary deduction in computing taxable income will be phased in as follows:

Equation (available in full paper)

The deduction generally applies to all capital property owned by Canadian resident individuals, but not by trusts. It will also apply to gains realized in a partnership and generally to gains designated by a trust.

Each individual will be required to determine an annual gains limit and a cumulative gains limit to measure entitlement to the exemption. Individuals are required to report all taxable capital gains and claim a deduction for exempt gains in computing taxable income. An individual who fails to report a gain knowingly or under circumstances amounting to gross negligence is denied the subsequent deduction of that gain.