Key Changes to Canadian Tax Policies in 2024

Revised Capital Gains Inclusion Rate

Budget 2024 revises the capital gains inclusion rate. For corporations and trusts, as well as for individuals on gains exceeding $250,000, the rate will increase from 50% to 66.66%. This change, effective June 25, 2024, will require careful planning to optimize tax strategies, especially for high-value transactions occurring after this date.

For 2024, individuals will be able to realize any amount of capital gains before June 25, 2024, at the 50% inclusion rate, and then still be able to realize an additional $250k of realized capital gains between June 24, 2024, to December 31, 2024, that qualify for the 50% inclusion rate. Any realized capital gains above $250,000 between June 24, 2024, to December 31, 2024, will be subject to the higher 66.66% inclusion rate. As an example, assuming an Ontario individual is already in the top Ontario marginal tax bracket of 53.53%, a 50% inclusion rate results in capital gains taxed at 26.76%, whereas a 66.66% inclusion rate results in capital gains taxed at 35.68%, for an increase of 8.92%. Note that leaving Canada and dying in Canada with greater than $250k of unrealized gains just got significantly more expensive! See our Canadian Deemed Departure Tax blog for more information. 

Corporations and trusts are not offered the $250k capital gain threshold, meaning all capital gains after June 24, 2024, will be subject to the higher 66.66% inclusion rate. As an example, an Ontario corporation subject to a 50% inclusion rate results in capital gains taxed at 25.10%, whereas a 66.66% inclusion rate results in capital gains taxed at 33.46%, for an increase of 8.36%.

Does it make sense to go out and sell all your assets before June 25, 2024, to lock in the 50% inclusion rate?

Unfortunately, the answer depends on your unique situation and your plan for those assets in the future. If you were planning on selling the assets within the next year or so, then it could make sense to sell before June 25, 2024. If you are planning on keeping the assets for the long term, then it likely does not make sense to trigger a sale before June 25, 2024, and pay the associated tax (albeit at a lower expected rate than after June 24, 2024). This is because of the opportunity cost on the cash you use to make the tax payment – if you do not sell the asset, then you keep the tax dollars invested and they could continue to grow. The opportunity cost is dramatically impacted by your time horizon and investment return. A high-level example would provide for an approximate 7-year breakeven for an investment that continues to grow at a 7% constant return each year, meaning you would be better off on an after-tax basis to not sell the asset before June 24, 2024, if you can obtain a 7% return each year for 7 years. There are many variables that go into this calculation though, so please contact Cardinal Point to analyze your specific situation. 

Enhancing the Lifetime Capital Gains Exemption

In a significant update from the Budget 2024, the Lifetime Capital Gains Exemption (LCGE) has been revised upwards. Previously capped at $1,016,836 for 2024, the LCGE now increases to $1.25 million for eligible capital gains on the disposition of qualified small business corporation shares and certain types of farming or fishing property. This amendment, taking effect on June 25, 2024, aims to foster growth and incentivize investments in these sectors. Post-2025, the LCGE will once again be increased annually for inflation, ensuring that it keeps pace with economic shifts. Download our Lifetime Capital Gains Exemption & Qualified Small Business Corporation E-book for more information.

Introducing the Canadian Entrepreneurs’ Incentive

The Canadian Entrepreneurs’ Incentive, slated to start on January 1, 2025, represents a groundbreaking initiative designed to support the entrepreneurial spirit across Canada. This new measure offers a reduced 33.33% tax rate on capital gains derived from the sale of qualifying shares owned by eligible individuals. Eligible capital gains can reach up to $2 million over an individual’s lifetime, phased in increments of $200,000 annually from 2025 to 2034. A share of a corporation would be a qualifying share if certain conditions are met, including all the following conditions:

• At the time of sale, it was a share of the capital stock of a small business corporation (for the purposes of the Income Tax Act (ITA)) owned directly by the claimant.
• Throughout the 24-month period immediately before the disposition of the share, it was a share of a Canadian-Controlled Private Corporation (CCPC) and more than 50% of the fair market value (FMV) of the assets of the corporation were: (1) used principally in an active business carried on primarily in Canada by the CCPC, or by a related corporation, (2) certain shares or debts of connected corporations, or (3) a combination of these two types of assets.
• The claimant was a founding investor at the time the corporation was initially capitalized and held the share for a minimum of five years prior to disposition.
• At all times since the initial share subscription until the time that is immediately before the sale of the shares, the claimant directly owned shares amounting to more than 10 percent of the FMV of the issued and outstanding capital stock of the corporation and giving the individual more than 10% of the votes that could be cast at an annual meeting of the shareholders of the corporation.
• Throughout the five-year period immediately before the disposition of the share, the claimant must have been actively engaged on a regular, continuous, and substantial basis in the activities of the business.
• The share does not represent a direct or indirect interest in a professional corporation, a corporation whose principal asset is the reputation or skill of one or more employees, or a corporation that carries on certain types of businesses (including a business operating in the financial, insurance, real estate, food and accommodation, arts, recreation, or entertainment sector or providing consulting or personal care services).
• The share must have been obtained for FMV consideration.

Refining the Alternative Minimum Tax

Budget 2024 continues to refine the Alternative Minimum Tax (AMT) to ensure that it serves its purpose without undue burden. Notably, the allowable percentage for claiming the Charitable Donation Tax Credit under the AMT has been increased from 50% to 80%, reflecting a more generous approach towards charitable contributions. Other enhancements include full deductions for specific social benefits and the exemption of Employee Ownership Trusts from the AMT, promoting fairness and supporting workers’ investments in their companies. These amendments would apply to taxation years that begin on or after January 1, 2024 (the same day as the broader AMT amendments discussed in our Winter 2023/2024 Tax Highlights blog).

Expansion of the Home Buyers’ Plan

The Home Buyers’ Plan (HBP) is a well-regarded program that facilitates Canadians in purchasing their first home by allowing tax-free withdrawals from registered retirement savings plans (RRSPs). In an encouraging development, Budget 2024 increases the withdrawal limit from $35,000 to $60,000. This adjustment, applicable to withdrawals made after Budget Day 2024, extends to purchases made on behalf of disabled individuals as well. Furthermore, for first-time withdrawals made between 2022 and 2025, the start of the mandatory 15-year repayment period will see a three-year deferment, now beginning in the fifth year after withdrawal.

Conclusion

The changes introduced in Budget 2024 are poised to have a substantial impact on Canadians, particularly entrepreneurs, investors, and prospective home buyers. By adjusting tax incentives and support mechanisms, the government is not only looking to stimulate economic growth but also to provide tangible benefits to individuals across various sectors. As these changes unfold, staying informed and seeking expert financial advice will be key to navigating this new tax landscape effectively. Please contact Cardinal Point to discuss how these changes could impact your specific situation.