Looks like they got us again!
On April 16, 2024, in Ottawa, Canada’s Deputy Prime Minister and Minister of Finance, Chrystia Freeland, delivered the 2024 Federal Budget (2024 Budget), titled “Fairness For Every Generation.”
The federal government has focused this year’s budget on three overarching pillars: building more affordable homes, making life cost less and growing the economy in a way that is shared by all.
Please note that this is not a comprehensive review of the 2024 Budget. Rather, we have provided a summary of the most significant tax measures announced in the budget and the potential impact on you, your family, and your business.
Please also note that the measures introduced in the 2024 Budget are only proposals at this time and may not be enacted into law as described, or at all. You should consult with your tax and legal advisors for further discussion and analysis on how these proposals may affect your situation and before implementing any tax planning strategies.
The 2024 Budget does not contain any changes to personal or corporate income tax rates. However, it is notable that the 2024 Budget does contain a change to the capital gains inclusion rate for capital gains realized on or after June 25, 2024.
Capital Gains Inclusion Rate
Currently, 50% of a capital gain is included in calculating a taxpayer’s income. This is referred to as the capital gains inclusion rate. The 50% inclusion rate also applies to capital losses.
The 2024 Budget proposes to increase the capital gains inclusion rate from 50% to 66.67% for corporations and trusts, and from 50% to 66.67% on the portion of capital gains realized in the year that exceed $250,000 for individuals, for capital gains realized on or after June 25, 2024.
The $250,000 threshold would effectively apply to capital gains realized by an individual, either directly or indirectly via a partnership or trust, net of any:
For taxpayers claiming the employee stock option deduction, they would be provided a 33.33% deduction of the taxable benefit to reflect the new capital gains inclusion rate but would be entitled to a deduction of 50% of the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains.
Net capital losses of prior years would continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the capital gains being offset. This means that a capital loss realized prior to the rate change would fully offset an equivalent capital gain realized after the rate change.
For tax years that begin before and end on or after June 25, 2024, transitional rules will apply such that two different inclusion rates would apply based on when the capital gains and losses are realized. For capital gains and losses realized before June 25, 2024, they would be subject to the 50% inclusion rate. For capital gains and losses realized on or after June 25, 2024, the higher inclusion rate would apply on all capital gains for corporations and trusts and those exceeding the $250,000 threshold for individuals.
The annual $250,000 threshold for individuals is proposed to be fully available in 2024 and would not be prorated. It would apply only in respect of net capital gains realized on or after June 25.
Other consequential amendments would also be made to reflect the new inclusion rate. The 2024 Budget notes that additional design details will be released in the coming months.
Lifetime Capital Gains Exemption
Entrepreneurial Canadians are eligible to claim the LCGE on the disposition of Qualified Small Business Corporation shares and Qualified Farm or Fishing Property. Generally, the LCGE provides for tax-free growth on the capital gain eligible for the LCGE. The amount of the LCGE is currently $1,016,836 and is indexed to inflation.
The 2024 Budget proposes to increase the LCGE to apply to up to $1.25 million of eligible capital gains with respect to dispositions that occur on or after June 25, 2024. Indexation of the LCGE would resume in 2026.
Canadian Entrepreneurs’ Incentive
The 2024 Budget proposes to introduce the Canadian Entrepreneurs’ Incentive. This incentive would reduce the tax rate on capital gains upon the disposition of qualifying shares by an eligible individual. Specifically, this incentive would provide for a capital gains inclusion rate that is one-half of the prevailing inclusion rate on up to $2 million of capital gains per individual over their lifetime. So, under the new proposed capital gains inclusion rate of 66.67%, this measure will result in an inclusion rate of 33.33% for qualifying dispositions. This measure would apply in addition to any available capital gains exemption.
The lifetime limit would be phased in by increments of $200,000 per year, beginning on January 1, 2025, before ultimately reaching a value of $2 million by January 1, 2034. This measure would apply to dispositions that occur on or after January 1, 2025.
