The 2024 federal budget introduces significant changes in the taxation of capital gains, affecting individuals, corporations, and trusts. The adjustment in the capital gains tax inclusion rate is a key feature that will have widespread implications across the financial landscape of Canada. Below, we explore these changes, who they impact, and the strategic considerations for affected parties.
Individuals: Under the new budget, when an individual realizes a capital gain exceeding $250,000 in a year, the taxable inclusion rate on the excess amount will increase from 50% to 66.7%. For gains below this threshold, the existing rate of 50% continues to apply. This means that for a capital gain of $300,000, the first $250,000 will be taxed at a 50% inclusion rate, and the remaining $50,000 at a 66.7% rate. Note that the gain realised in the sale of a primary residence is not affected in the new budget.
Example: Suppose an individual sells a non-primary residence or a cottage inherited from a will; a $300,000 capital gain is taxed as follows:
This translates to $158,350 added to one's income for the year and is subject to that individual's marginal tax rate. Remember that the taxable amount is likely to push the marginal rate higher due to the realized gain.
This increased rate targets high-value transactions, likely affecting the sale of valuable real estate not covered by the primary residence exemption, shares, or business interests.
Corporations: For corporations, the new rule is more stringent, with all capital gains now taxed at a 66.7% inclusion rate regardless of the amount. This represents a significant shift from the previous uniform rate of 50%, impacting all levels of corporate capital gains from asset dispositions.
Example: A corporation sells an asset and realizes a capital gain of $500,000. Under the new regime, the entire gain is subject to a 66.7% inclusion rate:
Trusts, similar to corporations, will be affected by the increased inclusion rate on capital gains. This change will particularly impact family trusts and investment trusts that rely heavily on capital gains for generating income. The adjustment will necessitate a reevaluation of investment strategies and may influence decisions regarding the timing of asset dispositions, especially if nearing the 21 year rule. According to CRA, property held in a trust is deemed to be sold every 21 years, unless it is actually sold or rolled out to beneficiaries before the 21-year deadline. For tax purposes, if the trustee misses the 21-year deadline, it's as if they sold the asset. That means capital gains tax.
Professionals such as doctors, dentists, and farmers, who may plan to sell their practice/business as part of retirement planning, are particularly affected. Given that these sales often result in significant capital gains, the increased tax burden could alter retirement timelines or the structure of these transactions. The lifetime capital gains exemption may apply and could lower the tax burden; remember to speak with your tax professional.
The federal government has provided a window until June 25th, 2024; encouraging Canadians to consider disposing of assets likely to incur significant capital gains prior to the new rule taking effect. This "unusual" advanced warning by the federal government is speculated to trigger a rush to realize gains under the more favorable current tax regime. Bear in mind the new rule must be voted in. As of the writing of this blog post, the opposition party was not in complete alignment with the new budget, including the new capital gains tax. Many private lobby groups also voiced concerns:
The budget also increases the Lifetime Capital Gains Exemption by $250,000 to a new limit of $1.25 million for specific assets, including farms, fishing properties, and shares in qualified small business corporations. This enhancement allows individuals to shelter a larger portion of gains from taxation, provided the assets have been owned for at least 24 months before disposition.
Example: A farmer plans to sell a piece of qualifying farmland. With the increased exemption, they can now shield up to $1.25 million of the capital gain from taxes, a substantial increase that may affect decisions about the timing of such sales.
The 2024 federal budget's new rules on capital gains taxation represent a significant shift in Canada's fiscal policy, affecting a broad array of stakeholders from individual property owners to large corporations and trusts. As the implementation date approaches, affected parties should review their portfolios with their advisors or seriously consider finding a trusted advisor who can provide tailored recommendations to consider strategic asset management decisions to optimize their financial outcomes under the new tax regime.