FEDERAL BUDGET

Federal Budget 2024: Changes to capital gains tax

Budget 2024 introduces major changes to capital gains tax through the Income Tax Act (Canada). The goal is to increase the capital gains inclusion rate, impacting corporations, trusts and individuals.

Proposed changes

Currently, 50% of capital gains are included in taxable income. The budget proposes:

• Companies and trusts: Inclusion increased to 66.67%.

• Individuals: Rate of 66.67% applicable to annual gains over $250,000 (after deduction of capital losses). Gains up to $250,000 remain included at 50%.

• Changes to stock option deductions to align with these rates.

These new rules will apply to gains made after June 25, 2024, with transitional provisions for periods overlapping that date.

Example calculation for a company making a profit of $800,000 in 2024

1. Current rate (50% inclusion)

   • Taxable gain: $400,000

   • Tax payable: $200,000

2. Proposed rate (66.67% after $250,000)

   • First tranche ($250,000 at 50%): Tax: $62,500

   • Second tranche ($550,000 at 66.67%): Tax: $183,342.50

   • Total taxable: $491,685

   • Total tax: $245,842.50

Tax increase: $45,842.50.

Observations and impacts

1. Tax integration: These changes call into question tax fairness, particularly for holding companies, which do not benefit from the $250,000 exemption.

2. Non-residents: No distinction provided between residents and non-residents, impacting deductions on taxable assets.

3. Tax revenues: Estimated at $19.4 billion over five years, declining after 2024-25 as many taxpayers could accelerate their gains before implementation.

4. Inflation: The $250,000 threshold may not be indexed, affecting more taxpayers over time.

Strategies to mitigate the impact

• Accelerate sales: Crystallize gains before June 25, 2024 to take advantage of the current 50% rate.

• Reorganizations: Maximizing capital losses to offset future gains.

• Review investment vehicles: Consider alternatives such as limited partnerships or trusts.

• Charitable Donations: Take advantage of the capital gains exemption for donations of listed shares or eligible assets.

The 2024 Budget proposals will have significant implications for tax planning. Proactive planning and consultation with tax advisors are essential to effectively manage these changes and limit their negative impacts.