The 2024 Canadian Federal Budget

Capital gains inclusion rate

The capital gains inclusion rate will increase from 50% to 66.67% for capital gains realized on or after June 25, 2024.

• For individuals, this threshold increase will be for capital gains that exceed $250,000 per annum.
• For corporations and trusts, there is no threshold – meaning all capital gains will be subject to the 66.67% inclusion rate.

This change will unwind the foundational principle of integration, creating a tax disadvantage to realizing capital gains in a corporation vs. personally. An immediate consideration for all taxpayers is whether to crystalize accrued capital gains prior to June 25, 2024.

Gus Patel, CPA

Caution will need to be exercised for individuals and trusts. New Alternative Minimum Tax (“AMT”) rules may have limitations on triggered capital gains. Scenario analysis and calculations will need to be conducted for taxpayers subject to AMT.

We will continue to monitor the situation and remain available to clients looking to explore any potential consequences on their tax position in the coming months.

Capital gains exemption

The tax system provides an individual with a lifetime tax exemption for capital gains realized on the disposition of qualified small business corporation shares and qualified farm or fishing property.

As is customary in the annual budgets, the capital gains exemption will increase from $1,016,836 to $1,250,000, with the amount to be indexed with inflation commencing in 2026.

Canadian entrepreneurs’ incentive

Introduction of the new Canadian Entrepreneurs’ Incentive would reduce the capital gains inclusion rate to 33.33% of an individual on qualifying shares (having very narrow conditions for the average entrepreneur to meet) to a cumulative lifetime limit of $2,000,000, which will be phased in increments of $200,000 per year beginning on January 1, 2025.

Alternative minimum tax

AMT is a parallel tax calculation that allows fewer tax credits, deductions, and exemptions than under the personal income tax rules. Taxpayers pay either the regular tax or AMT, whichever is highest. The budget proposes to soften the impact when charitable donations are made. There are some other minor AMT amendments such as allowing certain other deductions and credits.

Employee ownership trust tax exemption

The 2023 budget proposed to create employee ownership trusts (“EOTs”), to facilitate transfer of shares of a corporation to employees. The conditions and rules surrounding the exemption are restrictive. This year’s budget has confirmed implementation of last year’s announcement.

Home buyers’ plan

The home buyers’ plan (“HBP”) helps eligible home buyers save for a down payment allowing them to withdraw from a registered retirement savings plan (“RRSP”) to purchase or build their first home.

The budget proposes to increase the withdrawal limit from $35,000 to $60,000.

Acceleration of capital cost allowance to eligible purpose-built rental projects

The capital cost allowance (“CCA”) system determines the deductions that a business may claim each year for income tax purposes on depreciable property. Currently, purpose-built rental buildings are eligible for CCA at 4%.

The budget proposes to accelerate eligible purpose-built rental projects to 10%.

Withholding for non-resident service providers

The government proposes changes to enable the Canada Revenue Agency (the “CRA”) to waive the withholding tax requirements under Regulation 105 for non-residents who carry on a business in Canada, who would otherwise, not be subject to Canadian tax liabilities.

Audit and enforcement

The budget proposes to increase the CRA’s powers when conducting their audits of taxpayers, including introduction of new penalties which can be imposed for non-cooperation.

Concluding remarks

Despite the social measures, the economic cost of these amendments result in deficit of $40B, with projected public debt charges for 2024 and 2025 at $54.1B and $64.3B respectively. The effectiveness of the suggested legislation including the Canadian Entrepreneurs’ Incentive, EOT, along with the broader implications of the increased capital gains rates, warrants careful analysis.

Our experts continue to consult with economists, analysts, and various other stakeholders as the budget progresses through Parliament via the review and approval of legislation, budget implementation bills, etc. We will continue to keep you informed as more certainty is available.