By Peter Sproule, CFP, CLU, CHS

Certified Financial Planner, Momentum Financial Services Inc.

 

The Federal Budget 2024 introduces several significant measures impacting professionals and business owners across various sectors. For high-net-worth individuals, some of the measures will have significant planning considerations. Understanding these changes is crucial for effective financial and estate planning. Increase in the Capital Gains Inclusion Rate. Budget 2024 proposes to increase the capital gains inclusion rate

Understanding these changes is crucial for effective financial and estate planning.

  1. Increase in the Capital Gains Inclusion Rate. Budget 2024 proposes to increase the capital gains inclusion rate from one-half to two-thirds for corporations and trusts. For individuals, graduated rate estates (GREs), and qualified disability trusts (QDTs), this rate applies to net capital gains exceeding $250,000 annually, excluding gains eligible for specific exemptions. This measure, effective from June 25, 2024, may lead to higher tax liabilities for high-net-worth individuals and entities with significant capital gains. For business owners investing retained earnings through their corporation, capital gains are now included at 66.67% on the first dollar of capital gain. The same applies for family, alter ego or spousal trusts.
  2. Lifetimes Capital Gains Exemption (LCGE) increase. The LCGE will see a one-time increase to $1.25 million for eligible capital gains on dispositions of Canadian-controlled private corporations (CCPCs) and Qualified Farm or Fishing Properties (QFFPs) occurring on or after June 25, 2024. Starting in 2026, this exemption will be indexed for inflation. This enhancement provides substantial tax relief, especially beneficial for business owners and investors planning to sell qualifying assets.
  3. Changes to the Alternative Minimum Tax (AMT). The 2023 federal budget introduced amendments to significantly change the AMT calculation. AMT is calculated in parallel with an individual’s regular income tax liability. However, it allows for fewer tax credits, deductions, and exemptions when compared to the ordinary personal income tax rules. Taxpayers pay the higher of the ordinary tax or the AMT liability. The 2024 budget introduces modifications to the AMT regime. Notably, individuals can now claim 80% of the Charitable Donation Tax Credit when calculating AMT, up from 50%. Additionally, trusts established under treaties, settlement agreements, or for the benefit of Indigenous groups will be exempt from AMT. These changes aim to provide greater tax fairness and support philanthropic activities.
  4. Canadian Entrepreneurs’ Incentive (CEI). The CEI is a new initiative reducing the capital gains inclusion rate by half for up to $2 million of gains on qualifying shares over an individual’s lifetime. This measure applies to dispositions from January 1, 2025, with a phased implementation of $200,000 per year of the lifetime limit. This incentive encourages entrepreneurship by providing significant tax incentives for Canadian business owners in specific sectors to sell their business to larger companies who can fund and scale growth. Note that professional corporations are exempt from this incentive.
  5. Changes to Employee Ownership Trusts (EOTs) The budget provides further details on the $10 million exemption for capital gains on sales to EOTs. To qualify, certain conditions must be met, including continuous ownership and active business involvement requirements. Disqualifying events within 36 months can negate this exemption. The exempt gains will be subject to a 30% AMT inclusion rate, and EOTs will be fully exempt from AMT. These rules apply to qualifying dispositions between January 1, 2024, and December 31, 2026, supporting employee ownership transitions. Similar to the CEI, professional corporations are not eligible for EOT purchases.

Other Noteworthy Measures

Housing

The Home Buyers’ Plan (HBP) withdrawal limit has increased from $35,000 to $60,000, with the ‘grace period’ for repayment extended from 2 to 5 years, with no change to the amortization. This means that an individual who hasn’t owned a property in the previous four tax years can withdraw up to $60,000 from their RRSPs for a down payment in 2024 and wouldn’t need to begin repaying the withdrawal until 2029. This enhancement aims to make home ownership more accessible.

Qualified Investments for Registered Plans

Led by former Bank of Canada Governor Stephen Poloz, the government has established a working group that is seeking stakeholder input on modernizing the qualified investments regime, potentially affecting pooled investment products in registered plans like RRSPs, RRIFs, TFSAs, DPSPs, DCPPs, and others.

Mineral Exploration Tax Credit

The 15% mineral exploration tax credit is extended for qualifying expenses incurred and renounced through flow-through share agreements until March 31, 2025. For high-income earners and investors with significant capital gains, this can help mitigate tax liabilities while offering the potential for significant growth.

Canada Carbon Rebate for Small Businesses

A retroactive rebate will be provided for fuel charges from 2019-2020 and 2023-2024 to small businesses with up to 499 employees, filing tax returns by July 15, 2024. Canadian-Controlled Private Corporations (CCPC) are automatically eligible for this rebate. The government stated that they would be releasing more details on this rebate in the coming months.

The Federal Budget 2024 introduced several significant changes to the taxation of capital gains, with has implications for business owners, landlords or people with secondary properties, incorporated professionals, and investors. While these changes may not require a change in your financial and tax strategies, it is worthwhile to review how your financial plan may be affected as some strategies require longer timelines than others.

With a complete understanding of the importance of tax planning, you can ensure that you are not paying more than your fair share of taxes, and that your wealth transfer strategy. Contact Momentum Financial Services today to start taking advantage of our expert estate planning services.