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Capital Gains Inclusion Rate: The budget on April 16, 2024 proposes a significant change in the capital gains inclusion rate:
For corporations and trusts, the inclusion rate increases from 1/2 to 2/3 for dispositions after June 24, 2024.
For individuals, the inclusion rate also increases to 2/3 for capital gains realized after June 24, 2024, exceeding an annual $250,000 threshold.
The threshold applies to individual capital gains after deducting losses and exemptions such as the Lifetime Capital Gains Exemption (LCGE) and others proposed (see below).
Transitional rules apply for taxation years spanning before and after June 24, 2024, with different inclusion rates for gains realized before and after this date.
The inclusion rate for net capital losses carried forward and applied against capital gains will be aligned with the inclusion rate of the capital gains being offset.
The highest marginal tax rate for individual capital gain will be increased from the existing 26.8% (53.53%*50%) to 35.7% (53.53%*2/3). The increased inclusion rate makes earning capital gains through a Canadian-controlled private corporation (CCPC) less attractive compared to direct earnings for most individuals for the annual $250,000 threshold. (See Appendix for an illustration.)
Further information on these changes will be provided in the coming months as the federal government has proposed the changes to the capital gains inclusion rate in a separate piece of legislation.
Stock Option Deduction Adjustment: To align with the new inclusion rate, the stock option deduction decreases to 1/3. Individuals can still benefit from a deduction of 1/2 of the taxable benefit up to a combined $250,000 for both employee stock options and capital gains.
Lifetime Capital Gains Exemption (LCGE) Increase: The LCGE on eligible capital gains rises from $1,016,836 to $1,250,000 for dispositions after June 24, 2024. Indexing to inflation will resume in 2026.
Canadian Entrepreneurs’ Incentive: The budget introduces the Canadian Entrepreneurs’ Incentive, aiming to reduce taxes on capital gains from share dispositions for eligible individuals meeting specific criteria:
Shares must belong to a small business corporation directly owned by the individual.
The corporation's assets (over 50% of fair market value) must be primarily used in an active business in Canada.
The individual must be a founding investor, holding shares for five years, and owning over 10% of shares and voting rights.
Active engagement in the business for the past five years is required.
Shares must not represent interests in certain types of corporations or sectors, such as professional corporations and food businesses.
The incentive offers a capital gains inclusion rate of half the prevailing rate on up to $2 million in gains per individual, phased in over ten years, reaching $2 million by January 1, 2034. This effectively allows an individual taxpayer to use a 1/3 capital gains inclusion rate for the disposition of qualifying shares. This reduced inclusion rate applies to qualifying dispositions after December 31, 2024, in addition to the Lifetime Capital Gains Exemption (LCGE).
Alternative Minimum Tax (AMT): The recent budget proposes further adjustments to the AMT regime, including:
Allowing individuals to claim 80% (up from 50%) of charitable donation tax credits when calculating AMT.
Introducing deductions for Guaranteed Income Supplement, social assistance, and workers compensation payments.
Making certain disallowed credits, such as federal political contribution tax credits, eligible for AMT carry-forward.
The increase in capital gain inclusion rate makes the AMT less relevant.
Home Buyers’ Plan (HBP): The budget proposes to assist first-time home buyers by proposing the following changes to HBP:
Increasing the withdrawal limit from $35,000 to $60,000 for eligible home buyers from their RRSP without facing taxation.
Temporarily extending the repayment grace period from two to five years under the HBP. This extension covers eligible withdrawals from January 1, 2022, to December 31, 2025.
Productivity-Enhancing Assets: The budget introduces immediate expensing, for certain productivity-enhancing assets acquired after April 15, 2024, and placed in service before January 1, 2027. This measure applies to the following CCA classes of assets:
Class 44: Patents or rights to use patented information.
Class 50: General-purpose electronic data-processing equipment and systems software.
Non-Compliance with Information Requests: The budget proposes amendments to the CRA information gathering provisions in the Income Tax Act (ITA):
Introducing a "notice of non-compliance" allowing the CRA to issue penalties for non-compliance.
Allowing the CRA to request information under oath or affirmation.
Imposing penalties when the CRA obtains a compliance order against a taxpayer.
Extending "stop the clock" rules to suspend assessment limitation periods during judicial review and when a notice of non-compliance is unresolved.
Canada Carbon Rebate for Small Business: The budget proposes the Canada Carbon Rebate for Small Business:
The rebate is an automatic refundable tax credit for CCPCs with fewer than 500 employees.
Eligible CCPCs can claim the tax credit for fuel charge years 2019-20 to 2023-24 by filing their 2023 taxation year tax return by July 15, 2024, with similar timelines for future years.
The credit amount is determined based on the number of employees the CCPC had.
Crypto-Asset Reporting: The adoption of the Crypto-Asset Reporting Framework (CARF) developed by the Organisation for Economic Co-operation and Development (OECD) in Canada:
The new reporting rules will target crypto-asset service providers resident or conducting business in Canada, facilitating exchange transactions in crypto-assets.
These providers will be required to report specific information concerning their customers and crypto-asset transactions.
These measures are slated to apply to the 2026 and subsequent calendar years.
Preliminary Planning Strategy:
Potential strategy to mitigate the increased capital gain inclusion rate is to intentionally realize capital gains prior to June 25, 2024 such that the entire gain is applicable to the existing 50% inclusion rate. However, the personal circumstances, prepayment of tax, the AMT, attribution rules and GAAR limitations need to be carefully considered. Moreover, will there be changes made to the budget proposals?
Speak to a tax professional for possible planning opportunities.
©2024 IMPACT CPA LLP, an Ontario limited liability partnership. All rights reserved.
Appendix – An Illustration of Corporate Capital Gain Tax in Ontario
Below example illustrates a Canadian controlled private corporation (CCPC) earns $100 in capital gains, to be taxed in the new capital gain inclusion rate of 2/3, as compared to the pre-June 25, 2024 inclusion rate of 1/2:
In summary, the new corporate capital gain to be realized at the shareholder’s hand will be taxed at 39% [(100-61)/100] when corporate and individual taxes are both considered, compared to 29% [(100-71)/100] prior to June 25, 2024. This is much higher than the individual’s capital gain tax of 27%, owing to the $250,000 threshold. It assumes that the shareholder is taxed at the individual’s highest marginal tax rate in Ontario. As such, the proposed increase in inclusion rate makes earning capital gains through a corporation less attractive compared to direct earnings for most individuals for the annual $250,000 threshold.
©2024 IMPACT CPA LLP, an Ontario limited liability partnership. All rights reserved.