Key Federal Budget Capital Gains Measures
1. Increase in Capital Gains Inclusion Rate
Change: Effective June 25, 2024, the capital gains inclusion rate increased from 50% to 66.67% for trusts and corporations, impacting the taxation of capital gains. For individuals, the inclusion rate also increased to 66.67% but is applicable only on annual capital gains above $250,000. The prior 50% inclusion rate will continue to apply on annual gains below the $250,000 threshold for individuals.
One-half of a capital gain (increased to 66.67%) is currently included in computing a taxpayer’s income. This is referred to as the capital gains inclusion rate. The current inclusion rate also applies to capital losses.
Impact: This adjustment means a higher portion of capital gains will be subject to income tax, potentially increasing the tax burden on real estate investments, property sales, and capital gains realized inside corporations (e.g., personal real estate corporations). Gains on a Canadian residential property (or rights to a pre-construction residential property) held for less than one year may be deemed to be business income (i.e., 100% taxable) under the residential property flipping rule unless an exception is met.
2. Increase to Lifetime Capital Gains Exemption (LCGE) for Entrepreneurs
Change: The LCGE will increase to $1.25 million (from $1.016 million) for eligible capital gains, applicable from June 25, 2024, onward.
Impact: If you’re selling shares of a qualified small business corporation (QSBC) or qualified farm and fishing property (QFFP), the impact of the increase in the lifetime capital gains exemption rises to $1.25 million.
3. Alternative Minimum Tax (AMT) Adjustments
Change: Continued adjustments to AMT rules to align with changes in regular income tax calculations. The Alternative Minimum Tax (AMT) is a parallel tax calculation that allows fewer tax credits, deductions, and exemptions than the ordinary personal income tax rules. Taxpayers pay either regular tax or AMT, whichever is highest.
Impact: AMT considerations become crucial in planning for capital gains realization and charitable contributions, affecting tax planning strategies.
4. Canadian Entrepreneurs’ Incentive
Introduction: A new initiative is reducing the capital gains tax rate to one-third on up to $2 million of qualifying shares, beginning in 2025. Specifically, this incentive would provide for a capital gains inclusion rate that is one half the prevailing inclusion rate, on up to $2 million in capital gains per individual over their lifetime.
Impact: While not applicable to professional corporations, this incentive promotes entrepreneurship by lowering the tax burden on qualifying share sales.
5. Strategic Planning Considerations
Consultation: Get in touch with a tax advisor to navigate these changes effectively and tailor strategies to your specific financial situation.
Long-term Planning: In light of these regulatory adjustments, assess the implications for retirement planning, estate management and future investment decisions.
As Budget 2024 reshapes tax policies affecting real estate professionals and their clients, proactive planning becomes paramount. This is just a high-level overview and we strongly encourages to seek expert professional advice to safeguard your financial interests amidst these evolving fiscal landscapes.
REMINDER: If the property was solely your principal residence for every year you owned it, and you owned it for at least one year, you do not have to pay tax on the gain. If at any time during the period you owned the property, it was not your principal residence, or solely your principal residence, you might not be able to benefit from the principal residence exemption on all or part of the capital gain that you have to report.
Written by:
Toronto Real Estate Board
