The 2024 Federal Budget was released late this afternoon. While many of the new Federal Government programs were announced in the past few weeks, the Budget contained lots of new tax considerations that individuals and business owners need to be aware of.
Lately, there has been talk about the “Positive Sandwich” around the Office. It is when you have to deliver some negative news, you should start with positive, share the negative and wrap it up on a positive note.
So, here is my “Positive Sandwich” on the 2024 Budget.
First Slice of Positive.
Increase to the Capital Gain Exemption for Active Businesses, Fishing and Farming Corporations.
The Lifetime Capital Gains Exemption is increasing to $1.25 million. The CGE can be used when a Business Owner, Fisher or Farmer sells the shares of their corporation. There are lots of rules that have to be used to determine eligibility and I will save that for another day. This is good news for individuals who are selling their shares, as this increase can mean additional tax savings in the range of $60,000 on a share sale of $1.25 million. (Total savings can be in the range of $310,000).
On top of the increase the CGE, the Budget introduces the Canadian Entrepreneurs’ Incentive, which will reduce the capital gain inclusion rate on $2 million of capital gains to 33% (it would currently be 50%). Further tax savings for the Business Owner.
There are some other positive measures that include a Carbon Tax Rebate for Small Businesses, Investment in Young Entrepreneurs and no direct increases in tax rates for Individuals. I will share more about these another time.
Now, here comes the negative…
Increase to the Capital Gains Inclusion Rate
The Budget proposes an increase to the income inclusion rate on Capital Gains greater than $250,000. This increase goes from the current 50% to 66.67%. What it means is that capital gains are going to attract more tax as you have to include more of the gain in your income. While individuals are provided that the first $250,000 of Capital Gain will be included in their income at 50%, any gain above $250,000 will be included at 66.67%.
While not legislated yet, the target date for this change is June 25, 2024.
I know that you may be saying to yourself, that is a sizeable limit and that will never effect me (much like the Budget is stating), however, consider this scenario:
Your Surviving Parent is the sole owner of the Family Cottage and they pass away. The Family Cottage was inherited sometime back in the 1970s or 1980s by your Parents. The cost of the Cottage was $10,000. Currently, the Family Cottage is valued at $360,000. So there is a Capital Gain of $350,000.
If the Capital Gain is incurred before June 25, 2024, the amount of income is $175,000 and in the highest tax bracket, the tax would be $92,750. After June 25, 2024, the tax would be $98,600, an increase of approximately $6,000.
While the increase is not significant for an individual, Corporations and Trust will not get a $250,000 limit, all capital gains incurred after June 25, 2024 will be subject to 2/3 income inclusion. This is where there is a significant difference in tax liability.
On a $100,000 capital gain, the tax liability increases from $26,500 to $35,351, a 33% tax increase.
Final Slice of Positive
I promised that this would be a Positive Sandwich, so I will end on a positive note. That positive note is that the changes to the Capital Gains Income Inclusion is not set to change until June 25, 2024, approximately 8 weeks from Budget Day.
So if you are contemplating selling a property or you have a Holding Company with investments that you have worked hard to save or you have been thinking about your Estate planning, this Budget will have you making some important decisions in the next 8 weeks.
In the next 8 weeks, we will be talking with our clients about strategies around Capital Gains and options to minimize the tax impact of these changes. One thing is for certain, June 25, 2024 just became an important day for Tax Advisors in Canada.
Until next time,
Jason