The release of a new, updated tax form doesn’t generally make headline news, but this week’s publication of the Canada Revenue Agency’s (CRA) 2024 Schedule 3, Capital Gains or Losses has more than a few investors, along with their accountants, scratching their heads.
The form, which is now four pages long, is divided into five sections.
Part one is used to report the sale of your principal residence in 2024. This is required even if you’re claiming the principal residence exemption to shelter the entire gain from tax.
Part two is asking whether you disposed of a “flipped property” in 2024. A flipped property includes a housing unit (including a rental property) located in Canada that you owned for less than 365 consecutive days before selling it. A property is not considered a flipped property if you sold it due to a “life event,” such as the death of a spouse or other family member, separation or divorce, or an eligible work relocation, among other events. If you disposed of a flipped property, the gain on the sale is taxable as 100 per cent business income and not as a capital gain, and accordingly, does not get reported on the capital gains schedule, but should instead be reported on Form T2125, Statement of Business or Professional Activities.
But it’s the third part of the form that is raising some eyebrows from tax preparers. Part three, entitled Total gains or losses on dispositions, is broken down into two subparts. The first is labelled Period 1: Dispositions between January 1 and June 24, 2024, and the second, Period 2: Dispositions between June 25 and December 31, 2024.
The two discrete periods seem to be left over from the 2024 federal budget announcement that proposed an increase to the capital gains inclusion rate for gains realized on or after June 25, 2024, of 66.67 per cent, up from 50 per cent, for capital gains over $250,000 annually.
In November 2024, the CRA announced that while the capital gains tax increase had yet to be formally adopted by Parliament, it would begin administering the capital gains tax increase as of June 25, 2024. It’s likely at this time that the redesigned Schedule 3 was in its final development stage.
But, on January 6, Parliament was prorogued, and the capital gains legislation officially died on the order paper. And, on January 31, the day the new Schedule 3 was originally supposed to be released, the government surprised us by backtracking, and delaying the implementation date of the capital gains increase to January 1, 2026. This meant that for the 2024 tax year, all capital gains, whether realized before or after June 25, and whether less than or exceeding $250,000 annually, will continue to be taxed at the current inclusion rate of 50 per cent.
This 50 per cent inclusion rate is, indeed, reflected on the updated Schedule 3 of the new form, where the total of all gains in period 1 and the total of all gains in period 2 are simply added together, and a 50 per cent inclusion rate is applied.
So, why the complexity, and the two discrete periods for capital gains reporting?
First, as part of the January 31 announcement, the government stated its intention to maintain several other measures related to the capital gains tax rules that are beneficial to taxpayers. One of these is the increase of the lifetime capital gains exemption on the sale of small business shares and farming and fishing property to $1.25 million, from the current amount of $1,016,836, effective June 25, 2024. Clearly, if you sold your qualifying business, farm, or fishing property after June 24, and want to take advantage of the higher exemption, the government would need to know in which period you sold your shares or qualifying property.
In addition, many brokerages are reporting investors’ gains (or losses) on a customized gain/loss summary report, or a T5008 Statement of Securities Transactions slip, in which pre- and post-June 25 gains are separately disclosed.
But the main reason can be gleaned from Part 4 of the Form, in which you declare any capital gains (or losses) reported to you on your T3, T5, T5013 and T4PS slips.
Take the T3 slip, for example, which is used by mutual fund trusts to report distributions they made to unitholders during the 2024 tax year. The T3 slip for 2024 has a variety of boxes to report capital gains realized by the mutual fund that were distributed to investors. Box 21 reports the total capital gains distributions in the year, Box 52 shows the capital gains from dispositions before June 25, 2024, while Box 53 reports the capital gains from dispositions after June 24, 2024.
Since most, if not all, fund companies already finalized the format and design of their tax reporting slips months ago, when the CRA requirements specified that the slips were to report gains on a pre- and post-June 25 date, it was likely too late to change the T3 reporting for 2024 at the time the deferral was announced on January 31. A CRA spokesperson confirmed that period 1 and period 2 reporting “is being maintained to ensure continued alignment with the tax slips that have already been published and are currently being issued to Canadians and filed with the CRA.”
That’s why Part 4 of the new Schedule 3 shows two columns – one for reporting gains from T-slips pre-June 25, and one for gains from June 25 onwards. In the end, however, both columns are simply added together, and a 50 per cent inclusion rate applies to the total for 2024.
Given that 92.3 per cent of taxpayers filed their personal tax returns electronically in 2023 using CRA approved filing software, the hope is that taxpayers who either hire a professional tax preparer or accountant, or those who use tax filing software, won’t be too confused by the new Schedule 3. Correctly inputting the boxes from the various T-slips into the software should send them to the right sections of the schedule, allowing for a smooth filing season.