Last week the Canadian government presented their 2024 Federal Budget, which contained several items that may be of interest to Canadians. 

From a financial standpoint, at first glance the main concern with this budget is that it lacks clear priorities and fails to address key issues facing Canada. Many professionals feel that the budget lacks focus and coherence, with a plethora of initiatives but no overall strategy. Among them, it appears that this government is prioritizing short-term political gains over long-term vision (possible with a looming election in mind…) and fails to provide a clear direction for the country’s future.

Below are a few highlights that may impact many Canadians (along with our initial reaction).

Capital gains inclusion rate to increase

Currently, the capital gains inclusion is 50%, meaning half of any capital gain is taxable, and the other half is tax free. The budget proposes to increase the capital gains inclusion rate to two-thirds for any gains realized by corporations and trusts by June 25, 2024. 

The budget also proposes to increase the inclusion rate for personal capital gains from 50% to 66.7% for the portion of capital gains realized by individuals in a year that exceed $250,000.

This will certainly impact those who have professional corporations, as it is a significant increase to any capital gains realized in your business. Moving forward this could impact investment, compensation, and succession strategies. Without going in depth, this change represents close to a 10% increase in taxes owed on realized gains for corporations and trusts.

For personal capital gains, this may require additional planning to spread realized capital gains from investments over multiple calendar years to stay below the threshold.   For most Canadians this will not pose much of a change except when it comes to real estate. Selling personally held income properties with significant gains would see an increase in overall tax, but perhaps most importantly the concern is for personally held property transferring between generations. For instance, the family cottage, which would now be subject to higher taxes to pass it down to future generations. 

Bottom line is that this change may require additional planning with your advisors.

Increase to the Home Buyers Plan 

The Home Buyer’s Plan has been a long-standing program to allow qualifying first-time home buyers to withdraw funds from their RRSPs tax free for the purchase of a home. The budget proposes to increase the amount that homebuyers can withdraw from their RRSP, from the previous limit of $35,000 to a proposed $60,000. 

While may appear as good news for first time buyers in a tough housing market, the concern is that this just adds to available funds that can be used to compete for home purchases… which may just lead to increased prices, not ideal! 

The other concern is that with many homeowners stretching for higher purchase prices, it is making the Home Buyer Plan repayment harder to pay back in future years. This is already being seen in Canada, will increasing the repayment amount by $25,000 make it any easier to pay back? It is important to remember that is essentially a “tax free loan” from your RRSP, and if it is not repaid, it is then considered taxable income and taxes will be owed.  

Lifetime Capital Gains Exemption Increase for Small Businesses

The Lifetime Capital Gains Exemption (LCGE) allows individuals to be exempt from taxes on capital gains realized on the disposition of qualified small business corporation shares. The 2024 federal budget proposes to increase the LCGE by 25% to $1.25 million and this amount will continue to be indexed in 2026 and future years.

This is a welcome increase to those looking to sell qualifying shares of their small businesses and move proceeds in a tax efficient manner into their personally held accounts. 

Canadian Entrepreneurs’ Incentive

The 2024 federal budget proposes to introduce the Canadian Entrepreneurs’ Incentive (CEI) to reduce the capital gains inclusion rate by one-half on the disposition of qualifying shares by an eligible individual starting January 1, 2025. 

The lifetime limit for this incentive would be phased in by increments of $200,000 per year beginning in 2025 and eventually reaching the maximum limit of $2 million If the individual is now subject to the 66.7% capital gains inclusion rate, this incentive would reduce the inclusion rate to one-third on disposition of qualifying shares. 

This incentive would be in addition to any LCGE so entrepreneurs can benefit from a larger exemption once it is fully rolled out in 10 years. This is good news to those looking to sell qualifying shares of their business in the future. 

We Can Help

As your financial advisor, we can help you assess the impact of these proposals on your personal finances or business affairs and show you ways to take advantage of these benefits or ease the impact of the changes to your plans. 

More information on the budget can be found here.