Budget 2024 was tabled in the House of Commons on April 16, 2024. Among other taxation initiatives proposed, the federal government announced significant changes to the capital gains inclusion rate, the lifetime capital gains exemption threshold and a new Canadian Entrepreneurs’ Incentive.
Capital gains inclusion rate
The current capital gains inclusion rate for both corporate and personal taxpayers is one-half, or 50%, of the capital gain realized. The other 50% of the gain flows tax-free to the taxpayer. Budget 2024 proposes to increase the inclusion rate to two-thirds of the capital gain, or 66.67%, for corporations and trusts, and for individuals on capital gains realized in a year which exceed $250,000.
This $250,000 threshold applies to capital gains realized by an individual directly or by way of a trust or partnership, and applies to annual capital gains realized which exceed current year capital losses, prior year capital losses carried forward to reduce current year capital gains and capital gains where the lifetime capital gains exemption, the proposed Employee Ownership Trust exemption or the proposed Canadian Entrepreneurs’ Incentive applies. The increased inclusion rate will apply to capital gains realized by taxpayers on or after June 25, 2024.
To illustrate, if an individual resident in Saskatchewan realizes a capital gain of $1 million prior to June 25, 2024, they would pay $237,500 of tax (assuming the full gain is taxed at the highest personal marginal tax rate). After June 25, 2024, this individual will pay $296,875 of tax on the same gain. If the gain is realized by a Canadian-controlled private corporation, the corporate tax payable prior to June 25, 2024 would be $253,350 ($100,000 of permanent corporate tax after the recovery of refundable tax). After June 25, 2024, the corporate tax on the same gain increases to $337,800 ($133,333 of permanent corporate tax).
This change means that taxpayers will pay additional tax when they sell capital assets which have appreciated in value, such as investments which are held in non-registered accounts and real property that does not qualify for the principal residence exemption. Income tax payable upon the death of a taxpayer could also increase.
Lifetime capital gains exemption
Currently, the lifetime capital gains exemption on the disposition of qualified small business corporation shares and qualified farm or fishing property is $1,016,836. Budget 2024 proposes to increase this limit to $1.25 million for dispositions occurring on or after June 25, 2024 (with future increases indexed to inflation). For individuals who have previously claimed the lifetime capital gains exemption, this will provide an opportunity to realize additional tax-free capital gains on future sales of qualifying property.
Canadian Entrepreneurs’ Incentive
The proposed Canadian Entrepreneurs’ Incentive (“CEI”) will create an reduced capital gains inclusion rate on the disposition of qualifying shares by eligible taxpayers. The capital gains inclusion rate for these dispositions will be one-third of the capital gain (versus the increased inclusion rate of two-thirds), up to a lifetime limit of $2 million of capital gains per taxpayer. The limit will be phased in over 10 years in increments of $200,000, beginning on January 1, 2025. The CEI will apply to dispositions that occur on or after January 1, 2025, and will apply in addition to any other available capital gains exemptions. This could result in an available exemption of up to $3.25 million (indexed to inflation).
The CEI is targeted at founders who provided initial capital to a company and who have continued to own voting shares representing more than ten (10%) of the votes and value of the company for five years. The founder must have been actively engaged in the business for a five-year period prior to the sale. Businesses that will qualify for the CEI are limited to those operating in specific industries.
The draft legislation to implement these changes and other tax initiatives set out in Budget 2024 has not yet been released. We will continue to monitor ongoing developments pertaining to the proposed tax initiatives presented in Budget 2024.
If you have questions about the personal and business tax implications of Budget 2024, including actions that you may wish to consider prior to June 25, 2024, one of the lawyers in our Taxation practice group who would be happy to assist you.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.