By Hani Al-Dajane
On April 16 2024, the Government of Canada released Budget 2024, which announced significant changes with regard to the tax treatment of capital gains. Business owners and individuals should be aware of these changes, especially if considering selling capital property such as land (other than a principal residence), stocks or a business. Capital gains are profits made on the sale of capital property. If the proceeds from the sale of the property exceed the property’s cost, a portion of the gain is taxable when the property is sold (capital gains realized). The “capital gains inclusion rate” means the portion of a capital gain that is subject to taxation. At the outset, it is important to note that most Canadians will not see a taxation increase if they have annual capital gains below the threshold of $250,000.
If in effect, the following changes will apply to capital gains that are realized on or after June 25 2024. The capital gains inclusion rate will be increased from 50% to 66.67% for corporations and trusts. For individuals, the inclusion rate will increase from 50% to 66.67% on capital gains per year that exceed $250,000. Below $250,000, the rate will remain at 50%. The amount of tax payable is dependent on overall yearly income (including capital gains). The highest federal tax bracket (income over $246,752) has a tax of around 50% when combined with provincial taxes.
What are some best practices for tax planning?
Capital gains realized by an individual (either directly or indirectly through a partnership or trust) are subject to the 50% inclusion rate each year for capital gains up to $250,000. The 50% inclusion rate up to $250,000 also applies to individuals when selling shares of a corporation. A corporation that is selling capital property can expect an increase in their tax bill as a greater percentage of the capital gain is now subject to tax.
An eligible individual is also entitled to the Lifetime Capital Gains Exemption (LCGE) on net gains from the disposition of qualified property (incl. small business corporation shares and farming & fishing property). Budget 2024 announced that, beginning June 25 2024, the LCGE will be increased to 1.25 million (from $1,016,836) and then indexed to inflation beginning in 2026. Starting in 2025, those with eligible capital gains below $2.25 million should pay less taxes as a result of these changes.
Individuals who own their businesses as sole proprietors should consider incorporation to take advantage of the LCGE upon the sale of the business. Be aware that there are conditions a corporation must fulfill in order to be eligible for the LCGE.
Another new budget item is the proposed Canadian Entrepreneurs’ Incentive (CEI), which will be phased in by yearly $200,000 increments beginning January 1 2025. The CEI only applies to certain qualifying shares and would allow for a capital gains inclusion rate of 33.3% (as opposed to 66.67%) on up to $2 million in capital gains over an individual’s lifetime. The CEI would be in addition to the LCGE. The individual claiming the CEI must be, among other things, a founding investor when the corporation was initially capitalized. The proposed CEI excludes a significant number of corporations and is focused on the technology and manufacturing sectors.
Budget 2024 also proposes to decrease the employee stock option deduction to 1/3 from ½.
Can I sell capital property before June 25, 2024?
Individuals seeking to sell capital property before June 25 2024 are permitted to do so. However, it may be difficult to obtain a buyer who has time to complete the due diligence process and will offer a fair price. In addition, individuals should be aware of Bill C-59 which seeks to expand the General Anti-Avoidance Rule (GAAR) in the Income Tax Act. The GAAR provisions seek to prevent avoidance transactions – a transaction carried out primarily to avoid the payment of taxes. Be careful not to run afoul of the GAAR provisions if the purpose behind selling capital property before June 25 2024 is to avoid taxation.
These changes to the Income Tax Act should be taken into account when making personal and business decisions. Speak to an accountant or the professionals at Emerge Law Professional Corporation to plan your next steps.
The contents of this article should not be construed as legal advice. Please contact Hani Al-Dajane at Emerge Law for any further questions.