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The recently announced 2024 Federal Budget, presented by Deputy Prime Minister Chrystia Freeland, introduces a number of changes impacting Canada's fiscal landscape. Notably, the budget prioritizes capital gains taxation, impacting investment strategies for individuals and corporations across the spectrum.
DO Wealth is committed to empowering our clients to navigate these evolving regulations. Here, we provide a simple analysis of the budget's key components and their potential implications for Canadian investors.
We hope this breakdown will help you better understand the 2024 Budget and some gain some simple strategies you can use to optimize your finances.
Changes to Capital Gains Taxes: How They Affect You
Starting June 25, 2024, how much tax you pay on capital gains is changing significantly. Here's the breakdown:
Higher Inclusion Rate: You'll now pay tax on a larger portion of your capital gains.
Individuals with net gains exceeding $250,000 annually will pay tax on two-thirds (⅔) of those gains. This applies to the portion exceeding $250,000, not your entire capital gain.
All capital gains for corporations and trusts will be taxed at the new ⅔ rate.
Important Note: The $250,000 threshold isn't a simple cap. It considers:
Deductible Losses: You can deduct current and past capital losses to lower your taxable gains.
Exemptions: Gains exempt from tax, like those covered by the Lifetime Capital Gains Exemption (LCGE), are not counted towards the threshold.
Understanding the Threshold:
This threshold applies to your net capital gains for the year, which considers:
Current year capital losses
Capital losses carried forward from previous years
Capital gains exempt from tax (LCGE, Employee Ownership Trust Exemption, Canadian Entrepreneurs' Incentive)
Only the portion of your net capital gains exceeding $250,000 is taxed at the higher ⅔ rate.
Employee Stock Options:
The deduction for employee stock options is dropping to reflect the new capital gains rate. This means you'll get a slightly smaller tax break (⅓ deduction instead of ½). There's also a combined limit of $250,000 for deducting both options and capital gains. Consider exercising options before June 25th to benefit from the current 50% deduction (if applicable).
Transition and Relief:
Loss Carry-Forwards: Losses from previous years can still offset your gains, but their value is adjusted for the new tax rate. This helps ease the transition.
Tax Year Split: If your tax year straddles June 25th, different rates apply to gains/losses realized before and after that date.
Strategic Timing: Investors may benefit from accelerating or deferring certain transactions during this period to optimize their tax position.
Example: Selling a Cottage Under New Rules
Suppose you decide to sell your cottage after June 25, 2024. The selling price results in a capital gain of $300,000. Here's how the new rules affect you:
Calculation of Taxable Gain: Only the amount over $250,000 is subject to the new ⅔ inclusion rate. So, $50,000 of your gain ($300,000 - $250,000) is taxed at ⅔, resulting in $33,333 being taxable.
Existing Losses and Exemptions: If you have previous capital losses or qualify for exemptions such as the LCGE, these can further reduce the taxable portion.
Strategic Considerations: If planning to sell multiple assets, consider the timing of these sales and your ability to use losses or exemptions across different assets to minimize taxes.
Broader Budget Measures Affecting Investors
Lifetime Capital Gains Exemption (LCGE)
The LCGE allows Canadians to shield a portion of their capital gains from taxes when selling qualified assets.The budget proposes to increase the LCGE from $1,016,836 to $1.25 million for sales of Qualified Small Business Corporation shares and Qualified Farm or Fishing Property occurring on or after June 25, 2024.
This is particularly advantageous for small business owners and agricultural operators, enabling them to shield more of their capital gains from taxes upon sale.
Canadian Entrepreneurs’ Incentive
The 2024 Federal Budget introduces the Canadian Entrepreneurs’ Incentive to support small business owners by reducing the capital gains tax rate. This incentive lowers the inclusion rate for capital gains on qualifying small business shares to 33.33%, half of the proposed general rate of 66.67%. It covers up to $2 million in lifetime capital gains per individual, phased in at $200,000 annually starting January 1, 2025, and reaching full implementation by 2034.
Qualification criteria for shares:
Shares must belong to a Canadian-Controlled Private Corporation (CCPC).
Claimants must have held at least 10% of the shares and voting rights for five years preceding the sale and have been actively engaged in the business.
Shares should be directly owned, not representing professional corporations or certain restricted sectors.
This incentive, effective January 1, 2025, aims to encourage investments in small businesses and facilitate active participation in their management and growth.
Updates to the Alternative Minimum Tax (AMT)
The 2024 Federal Budget proposes further modifications to the Alternative Minimum Tax (AMT) to ensure high-income earners and certain trusts pay a fair share of taxes. These amendments build on prior changes and include:
Charitable Donations: Increasing the deductible portion of the charitable donation tax credit from 50% to 80% under AMT.
Social Benefits: Allowing deductions for the Guaranteed Income Supplement (GIS), social assistance, and workers’ compensation payments under AMT.
Tax Credits: Full eligibility for the federal logging tax credit and inclusion of previously disallowed credits (like the federal political contribution tax credit and investment tax credits) in the AMT carry-forward.
Employee Ownership Trusts (EOTs): Exempting EOTs from the AMT.
These changes will be effective for tax years starting on or after January 1, 2024, aligning with broader AMT reforms previously announced. This adjustment enhances the equity of the tax system, impacting financial planning strategies for affected taxpayers. DO Wealth will provide ongoing guidance on navigating these AMT changes.
Home Buyers’ Plan Enhancements
The Home Buyers' Plan lets first-time Canadian homebuyers withdraw tax-free funds from their RRSPs to help with a down payment.The withdrawal limit for this program has increased from $35,000 to $60,000, effective for withdrawals made after April 16, 2024. Additionally, the start of the repayment period is deferred by three years for withdrawals made between January 1, 2022, and December 31, 2025.
These changes aim to assist Canadians in accessing the real estate market during ongoing affordability challenges, providing financial relief to prospective homebuyers.
Introduction of the Canada Disability Benefit
The 2024 Federal Budget announces the Canada Disability Benefit Act (CDDA), targeting financial support for low-income, working-age individuals with disabilities. Set to launch in June 2024 with disbursements beginning in July 2025, this benefit aims to bridge existing gaps between the Canada Child Benefit (CCB) and Old Age Security (OAS).
Highlights of this include:
Eligibility: Adults aged 18 to 64 holding a valid Disability Tax Credit certificate.-
Annual Benefit: Up to $2,400, complementing existing provincial and territorial programs.
Development: The government will engage with the disability community to refine benefit details, including income thresholds and reduction rates.
This initiative reflects a significant enhancement to the financial support system for Canadians with disabilities. DO Wealth will keep clients informed on how this development might impact their financial strategies.
Disability Supports Deduction (DSD) Expansion
The (DSD) lets Canadians with disabilities claim certain medical expenses that help them work or attend school.The list of deductible expenses under the DSD is now broadened to include more types of expenses, enhancing support for individuals with disabilities. This change takes effect for the 2024 tax year and onwards.
Strategic advisory from DO Wealth
DO Wealth remains focused on monitoring these changes, while proactively advising clients on how to adapt their investment strategies.We provide:
Timely Updates: Ensuring all clients are aware of legislative changes and their implications.
Strategic Financial Planning: Offering personalized advice and planning strategies to align with new tax laws and investment opportunities.
Holistic Advisory Services: Integrating aspects of investment strategy, health and wealth insurance services, and estate planning to provide a comprehensive service tailored to each client’s needs.
The 2024 Federal Budget introduces significant changes that demand thoughtful planning and strategic adjustments. At DO Wealth, we'll guide you through these changes effectively and help optimize your financial outcomes in this new fiscal landscape. For a more personalized discussion on how these changes might affect you, connect with us for a free consultation today!
