Last week the federal government announced their budget proposal for 2024 and there is a LOT to unpack. Whether you’re an experienced investor or just getting started on your financial journey, chances are something in this budget is going to touch your life.

Perhaps the most notable change the government announced is an increase to the capital gains inclusion rate. Capital gains are essentially the profit you are deemed to have earned when you sell (or are considered to have sold), capital property. When you have a capital gain you have to pay tax, but only on 50% of it. From a tax perspective this makes capital gains more appealing than other types of income like interest or dividends, which are currently taxed at higher rates.

What types of transactions can trigger a capital gain?

• Sale of stocks, bonds, segregated funds, mutual funds and ETFs (except those held in RRSPs, TFSAs or FHSAs)
• Sale of vacation, investment or rental property
• Sale of a business
• Upon death
• Upon ceasing residency in Canada

How are capital gains calculated?

Let’s look at an example using the current inclusion rate: Gina sells her rental property for $800,000. She originally bought it for $250,000. Her capital gain on the sale of the property is $550,000 (calculated as $800,000 minus $250,000). The capital gains inclusion rate is 50% meaning Gina will have to pay tax on half of her capital gain ie: $275,000 at her marginal tax rate. For simple math let’s assume she is in a 50% tax bracket. This would put her end tax liability at $137,500 ($275,000 x 50%), leaving her with a net profit of $412,500 ($550,000 – $137,500).

In the new budget the government announced that they will be increasing the capital gains inclusion rate for individuals from 50% to 66.67% on amounts greater than $250,000. This means individuals will pay tax on 50% of their capital gains up to $250,000, and 66.67% on capital gains above $250,000.

Continuing on with our example, let’s see how much more tax Gina will pay on the sale of her rental property under the new rules: Gross Profit (Capital Gain): $550,000 50% on first $250,000 = $125,000 66.67% of remaining $300,000 = $200,010 Total Taxable Capital Gain = $325,010 ($125,000 + $200,010) End Tax Liability = $162,505 ($325,010 x 50% tax rate) Net Profit = $387,495 ($550,000 – $162,505)

As you can see Gina will pay $25,005 more in income tax under the new inclusion rate which takes effect on June 25th of this year. Given that it’s still a couple of months away it will have some wondering whether they should be selling capital property now so they can realize their capital gains while the inclusion rate is still at 50%. Is this a good idea? Well, it depends on a couple of things. There may be an opportunity to benefit IF you were planning to sell your property in the near future anyways, but if you were otherwise planning to hold onto it there’s a good chance you’ll benefit more from long-term appreciation than you would by saving on income tax.

If you own the property jointly with someone else, for example your spouse, you’ll also want to consider whether you and the other owners might be able to share the capital gain, in which case you would each have your own $250,000 limit at the 50% rate. Keep in mind that whether or not property is jointly owned for tax purposes is based on the capital contribution of each party. For example, two spouses who purchase a cottage together who each paid 50% of the down payment would be considered joint owners and would be able to split the capital gain between their tax returns. On the other hand, if the entire down payment was made by one spouse then 100% of the capital gain will be attributed to them, regardless of who owns the property. I get asked this question a lot so it’s probably worth mentioning here that no, you cannot skirt this rule by first depositing the funds into a joint bank account and then making your down payment from there. Sorry.

Another question that’s been popping up is whether or not it’s possible to spread your capital gains out over a number of years such that the gain you report in a given year does not exceed the $250,000 threshold. Technically speaking, capital gains reserves do exist and allow for a taxpayer to spread out the payment of capital gains tax over several tax years, but in order to be eligible the taxpayer would have to also receive payment for the asset over a number of years (for example a private sale of a rental property where payment is received in installments rather than upfront). Second, while the capital gains reserve does provide a mechanism to spread out capital gains tax payments, the inclusion rate will likely be calculated upfront in year one, which would effectively render the strategy useless from a tax savings perspective. Formal legislation is still pending so I could be wrong on this, but I wouldn’t hold my breath.

Assets Held by Corporations and Trusts

If you’re the owner of a corporation or a trust you’re likely aware that the $250,000 threshold only applies to individuals, meaning if you sell any assets owned by your corporation or trust, the entire capital gain will be subject to the new inclusion rate (ie: 66.67%). This may have you questioning whether or not you might benefit from either selling assets in your corporation or trust prior to the June deadline. Again, this will be highly dependent on your situation but in general I think the same goes for corporations as it does for individuals and that is, you will need to weigh the benefits of lowering your tax liability agains the opportunity cost of losing that future appreciation. Unless you were already planning to sell the asset in the near future anyways, in most cases it won’t make a lot of sense to sell.

Another strategy on the table could be to transfer ownership of your capital assets from your corporation to yourself personally so that when you sell, you’ll be able to benefit from the lower inclusion rate. A lot of the time this won’t be practical just based on the nature of the business itself, but even in rare instances where this strategy is viable the benefits will still need to be weighed against the loss of other corporate tax planning opportunities.

Are you sensing a theme? Tax planning is complicated, get professional advice.

Even with the new changes, for most Canadians capital gains will continue to be the most tax efficient income you can earn. There will however, be exceptions in some cases in Saskatchewan, the Yukon and Québec, where dividends will sometimes be taxed at a lower rate.

Selling the Corporation Itself

We’ve covered assets owned by corporations but what if you want to sell the company itself? While it’s true this sale will be subject to the higher capital gains inclusion rate (ie 66.67%), the budget also includes some incentives that may reduce or altogether eliminate your new tax liability:

1. Increase to the Lifetime Capital Gains Exemption:

• A lifetime tax exemption for capital gains realized on the disposition of qualified small business corporation shares and qualified farm or fishing property
• The budget proposes an increase from the current amount of $1,016,836 to $1.25 million
• The increase would take effect on June 25, 2024, ie the same day the capital gains inclusion rate is scheduled to increase

2. Canadian Entrepreneur’s Incentive

• A new incentive that will reduce the tax rate on capital gains on the disposition of qualifying shares by an eligible individual
• Capital gains inclusion rate would be half of the prevailing rate on up to $2 million in capital gains per individual over their lifetime
• This lifetime limit would be phased in by increments of $200,000 per year starting in 2025 and reaching a value of $2 million by 2034.
• Under the new budget this would result in an inclusion rate of 33.33% (ie: 66.67% x 50%)
• Ineligible corporations include: professional corporations and corporations in financial, insurance, real estate, food and accommodation, arts, recreation and entertainment

Safe to say if you own a corporation in Canada your tax planning has become a little more complicated. Even if you’re not planning to sell your business anytime soon.