The Finance Minister Chrystia Freeland delivered the 2024 federal budget on April 16, 2024. Unprecedented changes were made with respect to the capital gain inclusion rate. The capital gain inclusion rate is proposed to be increased from 50% to 66 2/3%. The following is a summary of some of the most significant announcements contained in the 2024 federal budget.
Increasing the Capital Gain Rate:
Budget 2024 proposes increasing the capital gains inclusion rate from 50% to 66 2/3%. In particular, the inclusion rate increased for corporations and trusts to 66 2/3% and for individuals on the portion of capital gains realized in the year that exceeded $250,000. For individuals, capital gains realized that are below the $250,000 threshold will maintain the current inclusion rate of 50%.
In the province of Ontario, for the impacted taxpayers, the highest marginal tax rate for capital gains will increase approximately 8.9% from 26.76% to 35.69%.
The rate increase is effective for capital gains realized on or after June 25, 2024.
The net capital losses of prior years would continue to be deductible against taxable capital gains in the current and subsequent years by adjusting their value to reflect the inclusion rate of the capital gains being offset.
- Our observations:
Some impacted taxpayers should consider tax planning opportunities to crystalize their accrued gains before June 25, 2024, the effective date.
The proposed changes will put corporations and trusts not on the same footing as individuals with respect to capitals gains realized of less than $250,000.
A capital loss realized prior to the rate change would fully offset an equivalent capital gain realized after the rate change.
Legislation related to the change is not provided and may include additional criteria when announced.
The Capital Gain Rate Increase Impact on Employee Stock Options:
Generally, an employee exercising stock options that receive a stock option benefit, if all required conditions are met, will receive a 50% deduction from the benefit. The budget provides a 33 1/3% deduction of the taxable benefit due to the new capital gains inclusion rate. However, that individual 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.
- Our observations:
Impacted employees may have to consider the timing of the exercise and disposition of the acquired shares via stock options depending on the value and the realized gain to the options / shares.
Increasing the Lifetime Capital Gains Exemption (“LCGE”)
The budget proposes to increase the current LCGE from $1,016,836 to $1,250,000 for qualified dispositions that occur on or after June 25, 2024. The LCGE can be utilized by certain individuals who sell their ownership in a qualified small business corporation enabling them to shelter all or a portion of the capital gains tax that arise on the sale.
- Our observations:
The exemption increase will also benefit taxpayers who wish to sell their company to the next generation (adult children). Depending on the value, certain impacted taxpayers should consider whether the transfer should take place before or after June 25, 2024.
A Temporary $10M Tax Exemption if Selling Your Private Company to Your Employees
The budget proposes a tax exemption of up to $10 million in capital gains realized on the sale of a business to an Employee Ownership Trust (“EOT”). This measure is for a sale occurring between January 1, 2024 and December 31, 2026.
Some of the main conditions to claim the exemption are as follows:
- Must dispose of shares of a corporation that is not a professional corporation;
- The transferred shares must be exclusively owned by the individual claiming the exemption (or a related person), and over 50% of the fair market value of the corporation’s assets must be used principally in an active business throughout the 24 months immediately prior to the qualifying business transfer;
- The individual (or their spouse or common-law partner) must be actively engaged in the qualifying business on a regular and continuous basis for a minimum period of 24 months, at any time prior to the qualifying business transfer;
- The individual and the EOT must elect to be jointly and severally, or solitarily, liable for any tax payable by the individual as a result of the exemption being denied due to a disqualifying event within the first 36 months after a qualifying business transfer.
- Our observations:
Time is of the essence, as the exemption is temporary, and the company must be sold prior to December 31, 2026. Accordingly, tax planning may need to be considered now to ensure criteria and conditions are met.
If multiple individuals are involved in the share transfer, the $10 million exemption must be shared between the individuals. The individuals must agree on the allocation.
Alternative minimum tax applies, and the impact and the process of recovery must be considered.
Increase to The Home Buyer’s Plan (“HBP”)
The budget proposes to increase the withdrawal limit under the HBP from $35,000 to $60,000 for 2024 and subsequent calendar years. This is effective for HBP withdrawals on or after April 16, 2024. Under the current HBP conditions, the amounts withdrawn should commence being re-contributed two years following the year of withdrawal, with the full HBP withdrawal recontributed equally over a 15-year period, should the taxpayer wish not to have any adverse tax consequences. The budget is deferring this 15-year re-contribution period starting date to the fifth year following the year of withdrawal. This deferral is temporary and applicable for withdrawals up to December 31, 2025.
- Our observations:
Impacted taxpayers should discuss planning opportunities to maximize the deductions available under the RRSP programs, including considering the First Home Savings Account (“FHSA”).
Increased Tax Depreciation For Businesses and Purpose-Built Rental Housing:
Purpose-built rental housing
The budget introduces an accelerated tax depreciation of 10% for new eligible purpose-built rental projects that begin construction on or after April 16, 2024, and before January 1, 2031, and are available for use before January 1, 2036. Eligible property includes projects that convert existing non-residential real estate into a residential complex or add to an existing structure that meets the definition. The accelerated tax depreciation would not apply to renovations of existing residential complexes.
Productivity-enhancing assets
The budget provides immediate expensing of new additions to productivity-enhancing assets acquired on or after April 16, 2024, which become available for use before January 1, 2027. The scope of productivity-enhancing assets include patents or the rights to use patented information for a limited or unlimited period, data network infrastructure equipment and related systems software, and general-purpose electronic data-processing equipment and systems software.
Canada Carbon Rebate for Small Businesses
The budget introduces a new Canada Carbon Rebate (”CCR”) for Small Businesses in the form of an automatic refundable tax credit for eligible businesses. The CCR can be obtained by filing tax returns and would be available only to Canadian-Controlled Private Corporations (“CCPC”).
For the periods up to 2024, the CCPC must have filed a tax return for its 2023 taxation year by July 15, 2024, and must have no more than 499 employees throughout Canada in the calendar year.
The tax credit amount for an eligible CCPC for an applicable fuel charge year would be:
- Determined for each applicable province in which the eligible CCPC had employees in the calendar year in which the fuel charge year begins, and
- Equal to the number of persons employed by the eligible CCPC in the province in that calendar year multiplied by a payment rate specified by the Minister of Finance for the province for the corresponding fuel charge year.
The CRA will automatically determine and pay the tax credit amount to eligible CCPCs.
Please note certain announcements noted above do not have the related legislation published at this time and new conditions may be introduced at the time of enactment. For more information or to find out applicability, reach out to the team here at McGovern Hurley LLP, and we will be more than happy to assist.
John Mendis, Tax Advisory and Compliance Partner, jmendis@mcgovernhurley.com
Greg Furyk, Business Advisory and Compliance Partner, gfuryk@mcgovernhurley.com
