At first glance, the headline news from the 2024 federal budget was grim for wealthier Canadians, some business owners and professional corporations: a surprise tax increase that will have significant financial implications for many in those groups. But a week post-budget, we can see there’s room for tempered optimism. In fact, these changes present new opportunities for tax and financial planning that could deliver long-term financial benefits.
Before we look on the bright side, the bad news proposed in the 2024 federal budget is the increase to the capital gains inclusion rate. For a corporation or trust, the rate would jump from 50 per cent to 66 2/3 per cent when the measure takes effect on June 25, 2024. Individuals fared somewhat better, with the budget proposing that their first $250,000 in annual capital gains be taxed at the 50 per cent inclusion rate, with all gains in a tax year thereafter subject to the 66 2/3 per cent inclusion rate. The rate increase for individuals would also take effect on June 25, 2024, and apply to capital gains realized on or after that date.
The capital gains inclusion rate increase will not only pinch the pocketbooks of business owners and incorporated professionals—who for decades have relied on the corporation structure to both store and grow their wealth—but also families selling assets including secondary properties such as a cottage or rental unit, estates expecting non-registered capital gains of more than $250,000 (the principal residence exemption has not been changed) or individuals looking to sell a business or farm. In other words, the impact of the increase will be more widely felt than first advertised.
Budget 2024 proposes several taxpayer-friendly tax measures
On the upside, the budget did introduce several friendly personal and professional tax measures. One was an amendment to the Alternative Minimum Tax that would, among other changes, boost the amount of the donation tax credit to 80 per cent from the 50 per cent proposed by Ottawa in 2023. As originally proposed, the measure could have disincentivized larger charitable donations by wealthy Canadian philanthropists. It faced significant pushback from the Canadian charitable sector.
Another was the increase to the lifetime capital gains exemption, which would see the exemption rise to $1.25 million from $1.02 million on the disposition of qualifying small business corporation shares and qualifying farming and fishing property. That measure would also take effect on June 25, 2024. In addition, the Trudeau government is proposing to increase the Home Buyers’ Plan limit on withdrawals from a registered retirement savings plan to $60,000 from $35,000 for 2024. The 15-year repayment period would be extended to 18 years for individuals who make a withdrawal between January 1, 2022, and December 31, 2025.
Lastly, the budget introduced a new Canadian Entrepreneurs’ Incentive that would reduce the capital gains inclusion rate on the sale of qualifying shares for eligible individuals, reducing the rate by one half of the general inclusion rate of 33.3 per cent on as much as $2 million in capital gains over a qualifying individual’s lifetime. However, the CEI will be phased in gradually between 2025 and 2034 and includes a number of limitations. Businesses—including professional corporations—operating in sectors such as finance, real estate and consulting are not eligible for the new incentive.
To review the budget’s various tax and spending measures, visit the federal government’s budget web page.
Financial planning to achieve your lifestyle goals
Given the range of significant tax and various other policy measures in the 2024 federal budget, it’s more important than ever to work with your financial advisor and account/tax professional to develop a personalized tax planning strategy that takes your entire financial situation into account. There will be creative opportunities to mitigate the impact of the capital gains inclusion rate changes—think tools such as a vendor takeback on a second property, for example, which individuals could potentially use to spread capital gains over several years and avoid the 2/3 inclusion rate.
There’s an opportunity to act thanks to the two-month delay in implementation. Having that time to plan could enable you to trigger capital gains on the sale of some assets before the June 25th deadline. That could make sense, but only if pre-paying the tax on those gains aligns with your strategic financial plan. If you’ve been considering selling a property such as a family cottage, a pre-deadline sale could now be a more appealing option.
Being proactive around personal and corporate asset management—and taking a step back now to understand the bigger financial picture—could lead to substantial tax savings, especially if you and your advisors determine that near-term action is the best approach. That means also considering how vehicles such as life insurance, which offer tax-free growth within a policy, fit into your financial blueprint. And your investment strategy will likely need a review because the capital gains treatment of equities will no longer be as favourable after inclusion rate changes are implemented.
It would be easy to consider the 2024 federal budget to be highly problematic on the tax front. Instead, view it as a welcome chance to revisit your planning and to start a strategic conversation about how its many tax changes will impact your wealth—and the steps needed to ensure you stay on the path to achieving financial wellness.
The Bridgewell team
For assistance with your wealth and financial planning needs, contact a member of our team today.
