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2024 federal budget: Changes to the taxation of capital gains and other tax and benefit highlights

By ATB Wealth 17 April 2024 7 min read

The 2024 federal budget was tabled on April 16, 2024. In this article, we highlight the proposed capital gains inclusion rate increase, along with numerous other changes relating to capital gains. Additionally, we outline the proposed enhancements to the Home Buyers’ Plan for first-time homeowners and the new Canada Disability Benefit.

Capital gains inclusion rate increase

The capital gains inclusion rate is relevant to taxpayers that own capital assets that have appreciated in value or are expected to increase in value in the future. This may include mutual funds, stocks and bonds in a non-registered account, real estate and shares of a private corporation, among other things. 

The current capital gains inclusion rate is 50%, meaning that only 50% of realized capital gains are taxable, with the remaining 50% being tax free. Budget 2024 proposes to increase the capital gains inclusion rate to 66.67% for corporations and trusts, as well as for the portion of capital gains realized in the year that exceed $250,000 for individuals. 

Rather than coming into effect on budget day, the new 66.67% inclusion rate is proposed for capital gains realized on or after June 25, 2024. This provides a small window of opportunity (10 weeks) for impacted taxpayers to realize capital gains at the current inclusion rate of 50% before the 66.67% rate comes into effect.

A strategy of accelerating the realization of capital gains is likely most beneficial for those with a short investment horizon. For example, if you are already planning to liquidate a portion of your non-registered investments in the next year anyway, in order to fund lifestyle spending or a significant purchase, the value of the tax savings could outweigh the value of deferring the tax for a single year.

In contrast, triggering immediate taxes may not make sense where your time horizon is long. For example, non-registered investments are often intended as long-term investments to fund your retirement. Even though tax savings may be achieved by paying capital gains taxes today at a lower rate, this would come at the cost of a significant loss in tax deferral. By triggering a tax bill sooner than you intended, you would generally have a smaller amount of investment capital available to grow in the future. It can be important to compare the benefit of tax deferral against the cost of the incoming capital gains rate. 

The new capital gains inclusion rate is not intended to have an effect on the principal residence exemption.

Working together, your tax advisor and financial advisor can help you determine the best course of action for you based on the specifics of your financial situation.

Lifetime Capital Gains Exemption

The lifetime capital gains exemption (LCGE) is one of the most valuable tax savings opportunities available in Canada. While every individual in Canada has access to this benefit, the LCGE is only available in situations where an individual realizes a capital gain on the sale of qualified small business corporation shares or qualified farm or fishing property. LCGE-eligible capital gains are realized on a tax-free basis.

The lifetime limit for the LCGE is currently $1,016,836 in 2024 and is indexed to inflation. Budget 2024 proposes to increase the LCGE limit to $1.25 million for dispositions that occur on or after June 25, 2024, with indexation of the LCGE resuming in 2026.

Canadian Entrepreneurs’ Incentive

Budget 2024 proposes to introduce a new benefit that would reduce the now increased capital gains inclusion rate by half (i.e. to 33.33%) when disposing of qualifying shares of a company. Once fully implemented, the Canadian Entrepreneurs’ Incentive would reduce the capital gains inclusion rate on up to $2,000,000 of qualifying capital gains per individual during their lifetime. 

The tests to qualify for this incentive include several of the same requirements to access the LCGE. It also includes further requirements relating to the type of business carried on by the company, the structure of the business, and the level of involvement of the person claiming this incentive. This incentive will require careful consideration by a tax advisor to confirm whether any particular business owner qualifies.

This incentive is proposed to be introduced over a period of 10 years. The lifetime limit will begin at $200,000 of qualifying gains from Jan. 1, 2025, with an additional $200,000 of lifetime room added each year. This incentive is intended to apply alongside the existing LCGE, resulting in a combined amount of at least $3.25 million of tax-advantaged gains on the sale of a business per individual once the incentive is fully implemented.

Employee Ownership Trust Tax Exemption

An Employee Ownership Trust (EOT) describes a business ownership structure where a trust holds shares of a corporation for the benefit of the corporation’s employees. An EOT may be used to allow the employees of a business to acquire shares from the current business owner.

To encourage more business owners to consider a sale to an EOT, the Fall Economic Statement proposed to exempt the first $10 million of capital gains realized on the sale of a business to an EOT for vendors in 2024-2026 subject to certain conditions. Budget 2024 provides further details on the proposed exemption and conditions. It also proposes to extend the same benefits for qualifying sales to a worker cooperative corporation.

The $10 million exemption is intended to apply collectively to all sellers involved in a particular business transfer, rather than individually. If multiple owners are disposing of shares to an EOT, the total exemption claimed cannot exceed $10 million.

Budget 2024 also outlined certain “disqualifying events.” If these events occur within 36 months after the transfer, the exemption could be denied retroactively.

Employee stock option deduction

Stock options form a portion of some individuals’ compensation. Historically, employment income from qualifying stock option benefits has effectively benefited from a similar inclusion rate to capital gains income. In the case of stock options, this has resulted from the availability of a 50% stock option deduction. Budget 2024 proposes to decrease the stock option deduction to 33.33% to reflect the new capital gains inclusion rate, while maintaining the existing 50% deduction up to a combined limit of $250,000 for both employee stock options and capital gains.

Amendments to previously proposed AMT reforms

As its name suggests, Alternative Minimum Tax (AMT) is an alternate way to calculate tax. The purpose behind this parallel tax calculation is to ensure that high-income-earning individuals pay at least a minimum amount of tax when benefiting from certain deductions or credits. The complex AMT calculation involves adjusting regular taxable income using only those deductions and exemptions permitted for AMT purposes.

Budget 2023 announced amendments to the Income Tax Act that would change the AMT calculation. Draft legislative proposals to implement these changes were published in the summer of 2023. In addition to some technical amendments, Budget 2024 proposes that the tax treatment of charitable donations be revised to allow individuals to claim 80% (instead of the previously proposed 50%) of the Charitable Donation Tax Credit when calculating AMT. These amendments would apply to taxation years that begin on or after Jan. 1, 2024.

Budget 2024 also proposes that capital gains exempted through the use of EOTs will be subject to an inclusion rate of 30%. This is similar to the treatment for gains eligible for the lifetime capital gains exemption.

Other tax and benefit highlights

Increase to the maximum Home Buyers’ Plan withdrawal for new homeowners

The Home Buyers’ Plan is an existing benefit available for Canadian-resident first-time home buyers and persons with disabilities. Qualifying individuals can withdraw up to $35,000 from an RRSP for the purpose of buying a qualifying home, tax free. The amount must be repaid to the RRSP within 15 years, with the first repayment beginning in the second year after the year of withdrawal. No tax deduction is allowed for those repayments. 

Budget 2024 proposes to increase the maximum withdrawal limit to $60,000, effective for withdrawals made after April 16, 2024. Additionally, for withdrawals made between Jan. 1, 2022 and Dec. 31, 2025, homebuyers will not be required to make repayments to their RRSP until the fifth year after the year of withdrawal. First-time homebuyers should discuss how to benefit from this strategy with their advisors, together with the First Home Savings Account (FHSA) that came into effect in 2023.

These changes come alongside other adjustments to rules for first-time home buyers. You can read more about the new 30-year amortization periods for newly built homes and changes to the Canadian Mortgage Charter in Budget 2024.

Launch of the Canada Disability Benefit

The government previously introduced the Canada Disability Benefit Act with the intention of providing supplemental income for low-income individuals with a disability. Budget 2024 announces that the government will begin providing payments to eligible Canadians starting in July 2025 following successful completion of the regulatory process and consultations with persons with disabilities. The proposed maximum benefit amount is $2,400 per year for low-income persons between the ages of 18 and 64 with a valid Disability Tax Credit certificate.

The above summary highlights certain items from the federal budget. Please refer to the Government of Canada’s budget web page for further details regarding these and other initiatives.

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