The Canadian Federal Government’s 2024 Budget has introduced a significant proposed change to the way capital gains are included in taxable income from June 25, 2024, onwards.
Proposed Change in Inclusion Rate
- For individuals, the inclusion rate for annual gains realized above $250,000 will increase from the current 50% to two-thirds (66.67%). Gains under $250,000 will continue to be included in income at the existing 50% inclusion rate, and subject to tax at the individual’s marginal tax rate.
- For corporations and trusts, the changes are more sweeping, as the new inclusion rate will apply to all capital gains, regardless of the amount. This is contrary to the theory of tax integration in Canada and will create some unique tax planning considerations going forward for everyone with a company and/or a trust.
Proposed Change in Lifetime Capital Gains Exemption
- The budget also proposes an increased lifetime capital gains exemption (LCGE) for entrepreneurs, raising it to $1.25 million from the previous $1,016,836. This is coupled with a new incentive that applies to up to $2 million in capital gains per individual over a lifetime, with proceeds on gain of a qualified business sale being included in income at a 33.3% inclusion rate (half of the new 66.67%).
- There are many unique criteria which must be met to qualify for either of these benefits, and both are subject to Alternative Minimum Tax (AMT). If you own shares of a private Canadian controlled corporation and wish to discuss your options and long-term tax planning related to these incentives, please contact us.
Effective Date
- The adjustments are expected to come into effect on June 25, 2024.
- If you wish to consider crystallizing unrealized gains within your corporation, trust or personally, before the inclusion rate changes in June, please reach out to us to discuss. Time is of the essence for this planning.
How this May Affect You
- For individuals who aren’t experiencing a unique one-off transaction (e.g. sale of a rental property), the impact of these changes will likely be minimal on a year-to-year basis.
- For high-income individuals and corporations with investments, this adjustment will mean a higher tax bill on capital gains. It is unusual to leave undistributed income taxed within a trust, so it is unlikely this will lead to higher trust tax bills, but each situation is unique.
More Information
- As with any tax policy change, the effects will become more apparent over time.
- The government explanatory release is linked here: https://www.canada.ca/en/department-finance/news/2024/04/tax-fairness-for-every-generation.html
