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The Liberal government delivered the 2024 Federal Budget this
afternoon. To help finance their spending plans, the government
introduced, among other things, an increase to the capital gains
inclusion rate on realized gains. While there are a number of other
important changes proposed to Canada’s tax system in this
year’s Budget, the focus of this tax alert will be the
sweeping changes to the tax treatment of capital gains.
For the past 23 years, only one-half of a capital gain has been
included in computing a taxpayer’s income. Today’s
Budget proposes to increase the capital gains inclusion rate: for
corporations and trusts, to two-thirds; and for individuals,
two-thirds for the portion of the gain in excess of a $250,000
annual threshold. For individuals, the first $250,000 of realized
capital gains in each year will continue to be eligible for the
one-half inclusion rate. The rate increase applies to capital gains
realized on or after June 25, 2024. The Budget provides that
additional details regarding the implementation of the increase and
other corresponding measures will be announced in the coming
months.
To illustrate the impact of this change, an individual in
Ontario’s top marginal tax bracket with $1,000,000 of
unrealized capital gains in excess of the $250,000 threshold noted
above will incur close to an additional $90,000 of income taxes
upon the realization of the gains. This additional $90,000 of taxes
on the realization of the gain represents an additional 9% of taxes
on the disposition and a 33% increase in the amount of taxes this
individual would have otherwise had to pay prior to today’s
Budget.
The Federal Budget also announced that the lifetime capital
gains exemption will be increased to $1.25 million for the
dispositions of shares of a qualified small business corporation
that occur on or after June 25, 2024. Currently, the lifetime
capital gains exemption is $1,016,836 in 2024, and is indexed to
inflation. The Federal Budget provides that the indexation would
resume in 2026. It seems intentional that individuals who trigger a
capital gain in respect of shares that qualify for the lifetime
capital gains exemption before June 25, 2024, would not be able to
take advantage of the increased exemption.
Finally, the Federal Budget announced the framework for a new
Canadian Entrepreneurs’ Incentive. In general terms, these
rules would reduce the tax rate on capital gains realized on
qualifying shares by founding shareholders who are actively engaged
in an active business, up to a prescribed limit.
The current capital gains inclusion rate of 50% still applies
for dispositions occurring before June 25, 2024. As such, there is
a small window of opportunity to take advantage of the lower
inclusion rate.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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