2024 Federal Budget Highlights

APRIL 16, 2024

The 2024 federal budget announced tax measures that impact entrepreneurs and owners of investment holding companies. The mostsignificant measures increase the effective tax rate for capital gains tax for many taxpayers from roughly 26% to 35%. The capital gains increases are effective June 25th, providing taxpayers the opportunity to crystallize unrealized capital gains prior to the increase. An important exception to the increased rate is that individuals maintain the old rate for gains of up to $250,000 per year.

The budget provides an incentive to entrepreneurs by introducing the Canadian Entrepreneur’s Incentive. This is a new initiative reduces the capital gains rate from 26.7% to 17.8% for qualifying individuals and corporations.

Personal Tax Measures

Capital Gains Inclusion Rate Increase

The capital gains inclusion rate is currently 50%, but effective June 25, 2024, gains in excess of $250,000 each year, will be included in income at 67%. For an Ontario resident in the top tax bracket, this is an increase in tax on capital gains from 26.8% to 35.7%.

Losses carried forward will apply dollar for dollar against gains taxed at the new higher inclusion rates. In other words, a $100,000 loss created before the rule change will still offset all tax on a $100,000 gain after the rule change.

Lifetime Capital Gains Exemption

The capital gains exemption will increase from $1,016,836  to $1,250,000 for transactions on or after June 25. This exemption will remain $1,250,000 for 2025 and then be indexed from 2026 onward.

Canadian Entrepreneurs’ Incentive

This new initiative is for individuals who sell shares of a Canadian controlled private corporation. The capital gains tax rate will decrease to 17.8% from the current 26.6% on the first $200,000 of shares effective January 1, 2025. This limit increases annually by $200,000 each year to $2 million by 2034. This is in addition to the lifetime capital gains exemption limit.

In order to claim this reduced rate, the shares must meet certain tests some of which are similar to the existing lifetime capital gains conditions. There are a few unique conditions primarily around the shareholder being a founding member of the corporation and being actively involved in the business. There is also a minimum ownership period of 5 years.

Shares of certain types of corporations don’t qualify for this incentive, including professional corporations, real estate corporations, and consulting businesses.

Other personal tax changes:

Alternative minimum tax (AMT)

Welcome changes are proposed for the revised alternative minimum tax calculation that comes into effect in 2024. Under the originally proposed AMT rules, you were only allowed a 50% deduction for charitable donations and under the budget you are allowed an 80% deduction. For more information on the proposed changes please refer to early newsletter written that can be found here.

Home buyers plan

RRSP home buyers plan withdrawal limit increases from $35,000 to $60,000 effective immediately.

Corporate Tax Measures

Capital Gains Inclusion Rate Increase

The same increase in capital gains inclusion rate for individuals comes into effect for corporations and trusts. On or after June 25, 2024, the corporate tax rate on capital gains will increase to 33.4% from 25.1%.  This change not only increases the immediate tax on capital gains inside a corporation but decreases the amount of money you can immediately remove from a corporation tax free from 1/2 of the capital gain to 1/3 of the capital gain.

Corporate capital cost allowance changes and tax credits

Tax and tax credit rates changed for some classes of capital assets. The government continues to target support for rental housing and clean energy through changes to capital cost allowance (CCA) rules in these areas.

Some highlights of these changes are as follows:

  • Increase in CCA rate from 4% to 10% for purpose-built rental housing 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 would be new purpose-built rental housing that is a residential complex with at least four private apartment units or 10 private rooms; and in which at least 90 per cent of residential units are for long-term rentals.

  • Increase in the CCA rate to 100% for certain assets acquired on or after April 16, 2024 and becomes available for use before January 1, 2027. The classes impacted include the following:

    • Class 44  -  limited or unlimited life patent or a right to use patented information.

    • Class 46 – primarily data network infrastructure equipment and system software,

    • Class 50 – primarily general Computer and system software.

  • The last budget announced a refundable Clean Electricity investment tax credit of 15%. More details have been provided in this budget. Taxable Canadian corporations are eligible and property includes equipment to generate electricity from solar, wind, water, nuclear fission and geothermal.

Employee Ownership Tax Trust Exemption

The EOT is a new tax concept introduced by the 2023 budget where a trust holds shares of a corporation for its employee. It involves the sale of shares by an individual.  The 2024 budget proposes further detail on the exemption and conditions. 

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For those of you with large unrealized capital gains or potential transactions in the near term we look forward to helping you think through the optimal strategy for dealing with the changes. Please reach out to your RMR team members for assistance in navigating these changes.