What Advisors Need to Know About Budget 2024

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Jamie Golombek

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Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth. Well, I think the biggest news item in this year’s budget is an increase in the capital gains inclusion rate. Under current tax rules, if you sell capital property other than your principal residence and you have a profit, only 50% of that gain is taxable. The budget is proposing to increase the capital gains inclusion rate from 50% to two-thirds, and ultimately, this will only take place on June 25th, 2024. 

The good news is that for individuals, there’ll be a $250,000 exemption. That exemption does not apply to corporations or trusts. Effectively what this means is that if you sell a property before June 25th, 2024, your inclusion rate is 50%. If you sell a property after that, the first $250,000 will still at be at 50%, but anything above that will be taxable at a two-thirds inclusion rate. This has a number of implications. Well, first of all, for 2024 we’re going to have two inclusion rates. They’re going to be period one, which will be gains up ’til June 25th. Then we have period two, which are gains from June 25th onwards. 

Effectively, individuals will need to track these gains. I assume that, with the help of your investment advisor and your brokerage statements, you’ll be able to see which gains were earned in which period. It also means that now will be the time to consider some serious tax planning. In other words, does it make sense to realize a whole bunch of gains prior to June 25th if you have significant gains in a particular year, to be able to take advantage of the 50% inclusion rate? 

It also has other types of more complex planning. For example, imagine you have investments inside of a holding company because holding companies will be subject to a two-thirds inclusion rate as of June 25th. For future realization of gains, you’re going to actually face a higher tax rate in some cases in a corporation than you would personally. Because with the personal changes, the first $250,000 a year of capital gains will only be subject to a 50% inclusion rate, whereas the capital gains from dollar one in a corporation after June 25th will be subject to a two-thirds inclusion rate. 

What is the future of investment holdcos in Canada? Should they be disbanded? What would be the cost to get rid of or wind up a personal holding company? These are all really important decisions. In addition, any individuals who own a vacation property or perhaps an income or rental property, or a business owner who’s potentially contemplating a sale of those particular properties or shares, really have to think about the timing of that disposition, given that post June 25th, we could be in a situation where you’re looking at a capital gains inclusion rate of two-thirds. Ultimately, this is a very important discussion that investors want to have with their tax advisors, over the 10 weeks leading up to the June 25th deadline. 

Another important change in the budget announced today was a tweak to the alternative minimum tax for charitable donations. AMT is a parallel system that imposes a minimum level of tax on taxpayers who claim various tax deductions, exemptions and credits that reduces the tax that they owe to very low levels. Changes to the AMT were brought down in last year’s budget, and also came out and dropped legislation over the summer in August of 2023. 

One of the changes that was opposed by much of the charitable sector was a limitation on charitable donations, in which only 50% of the donation credit was available to offset your AMT under the AMT calculation. The government has responded positively to the request of the charitable sector, and will now permit 80% of the donation credit to be claimed when calculating AMT. I think this is a positive change. 

A couple of other notable changes. Number one, as announced last week, change to the Home Buyers’ Plan, which allows Canadians to come up with a down payment by borrowing money from their RSP. The amount that you could borrow has now gone up from $35,000 to $60,000. In addition, you don’t have to start paying that back for five years after you buy your home, in a new temporary rule for any withdrawals from Jan. 1st, 2022 to December 31st, 2025, so that’s a positive change. 

Then I would say for business owners, there’s a couple of really interesting changes. Number one, the lifetime capital gains exemption currently exempts the first million dollars or so of capital gains from tax on the sale of qualifying small business company shares, farming or fishing property. The budget today announced an increase of the lifetime capital gains exemption to $1.25 million of eligible gains for any dispositions on or after June 25th, 2024, with a full indexation of the lifetime exemption to resume starting thereafter. 

The other additional change for business owners is the Canadian Entrepreneurs’ Incentive, which would reduce the tax rate on capital gains on the sale of qualifying shares by providing a 50% of the prevailing inclusion rate. The new inclusion rate, as we know, will be two-thirds of capital gains. This will be reduced to one-third of capital gains, and that’s on up to $2 million of gains on the sale of qualifying shares per individual over their lifetime. Now, this is being phased in over 10 years, starting with $200,000 on Jan. 1st, 2025, before ultimately reaching $2 million by 2034. 

Then finally, there is a change to the funding of the CRA. One of the concerns that many investors have had over the years is that it’s impossible to reach the CRA by phone or if they reach the CRA by phone, they experience extremely long wait times. The government has announced today $336 million over two years starting in the 2024-2025 fiscal period to the CRA, to be able to maintain its call center resources and hopefully improve the overall efficiency of these call centers, to be able to respond accurately to taxpayers’ questions in a more timely manner. 

The most important takeaway for advisors to speak about with clients, of course, is the increase in the capital gains inclusion rate. Now, for the majority of Canadians this is inconsequential, because a typical Canadian doesn’t realize more than $250,000 a year of capital gains. For our higher net worth clients, this is a very important discussion in terms of tax planning. 

What should be done going forward with significant capital gains that are accrued? Do we make some sales? Do we rebalance a portfolio by June 25th to ensure a 50% inclusion rate? Are we more strategic in future years to be able to time those capital gains dispositions so that we are subject to the lower rate on the first $250,000 a year of capital gains? Lots of important discussions, particularly for clients that may also own investments inside of a corporation, because corporations will not get the $250,000 exception for gains after June 25th, 2024.