07 Jun 2024 Capital Gains Changes
In our previous Federal Budget newsletter, we mentioned several proposed changes to capital gains taxation.
Capital Gains Inclusion Rate
As previously mentioned, the 2024 Federal Budget proposes increasing the current capital gains inclusion rate for certain taxpayers effective June 25, 2024. The proposed legislation to implement this change was released on June 10th.
Based on the proposed legislation, the inclusion rate for corporations and trusts will increase from 50% to 66.67%. Individuals will only be subject to the 66.67% rate on the portion of capital gains that exceed $250,000 in a given year.
The impact on taxpayers subject to this higher inclusion rate will be an increase in tax of approximately 9% to 10% on the gross amount of the gain. For example, if you had a $1,000,000 gain, your additional tax due to this proposed change would be between $90,000 and $100,000 higher.
Over the past few weeks, we have had discussions with numerous clients and others who may be impacted by this proposed change. We have examined whether it makes sense to realize a capital gain before June 25th. There are a few circumstances where taxpayers should consider realizing gains (assuming that they will be subject to the new rates):
- You have already decided to sell the asset regardless. For example, suppose you had an investment portfolio and wanted to sell a specific security anyway. In that case, you may consider whether selling that security before these changes makes sense (assuming it meets your investment objectives).
- You have a confirmed sale that will be completed after June 25th. Depending on the amount of the gain expected, you might want to consider undertaking a transaction to realize the gain before June 25th, as it could save you up to 10% tax.
- You want to realize the gain to access the tax attributes (capital dividend account and RDTOH) that are triggered on a gain.
These proposed changes may also significantly impact your estate planning. Please contact your Clearline advisor if you have any questions or would like to review your estate planning.
Capital Gains Exemption
The Budget proposed to increase the Lifetime Capital Gains Exemption (LCGE) to $1,250,000 (from $1,016,836) on eligible capital gains. This measure would apply to dispositions on or after June 25, 2024.
If you are selling a qualified small business corporation for more than $1 million, then delaying the sale until after June 25th would be more beneficial to be eligible for this higher amount.
A Family Trust is still a good planning technique that may allow someone to multiply this higher amount of the LCGE on a sale.
Canadian Entrepreneurs’ Incentive
The Budget proposed introducing a new incentive that would reduce the tax rate on capital gains on an eligible individual’s disposition of qualifying shares. These new rules were not included in the draft legislation that was released.
This incentive would provide for a capital gains inclusion rate of 50% of the prevailing inclusion rate. The lifetime limit would be phased in by increments of $200,000 per year, beginning on January 1, 2025, until it reaches $2 million by January 1, 2034.
Under the proposed 66.67% capital gains inclusion rate, this incentive would result in an inclusion rate of 33.33% for qualifying dispositions up to the accumulated threshold above. This would apply to any available LCGE.
The test for a qualifying share for this incentive is significantly more restrictive than those rules for the LCGE. For example, the investor must be a founding investor at the time the company was incorporated, hold the shares for a minimum of five years, own more than 10% of the votes and value of the company, and must be actively engaged in the business for a minimum of five years. Further, the shares cannot be of a professional corporation, a company whose assets depend on the reputation or skill of its employees, or shares of certain types of services industries (finance, insurance, real estate, food and accommodation, arts, recreation, etc).
