Canada’s 2024 Budget – How New Taxes on Capital Gains Affect YOU

Canada’s updated tax regulations on capital gains could potentially increase tax liabilities for those owning cottages, possessing unregistered online brokerage accounts, or making investments within their corporations.

The recent budget announcement by the Liberal government was packed with changes, making it challenging to digest. Key amongst these, from a personal finance perspective, was the alteration to the capital gains tax, bumping the inclusion rate from 50% to 66.67% for certain individuals and corporations. This modification is immediate after June 25^th, 2024 and substantial, warranting everyone’s attention.

The biggest unfair impact in my opinion is that it is applied on all your historically generated gains that are behind you and not from inception of new rules forward.

What does this new 66.67% inclusion rate mean? Essentially, the government isn’t just tweaking the tax rate on capital gains but adjusting the inclusion rate. Until now, the Canada Revenue Agency taxed only half of your capital gains. For instance, if you bought a stock at $50 and sold it at $100, only $25 of your $50 gain was taxable. This was under the rationale that corporations had already paid taxes during their growth phases. The new rate means a higher portion of capital gains will now be taxable.

This change targets wealthier households and, more pointedly, business owners. The new rules will particularly affect those who have invested inside a corporation, such as affluent professionals or contractors. For individual taxpayers, the first $250,000 in capital gains each year will remain taxed at the old rate, but any gains beyond this threshold will see the new rate applied.

The government has given taxpayers a 10-week window to decide whether to realize their capital gains at the old rate before the new one takes effect. This strategic move might prompt an early realization of gains, boosting tax revenues for 2024—a significant consideration given the looming 2025 election.

Looking specifically at CCPC business owners, the new regulations pose a distinct challenge. Historical government actions have already tightened the noose on tax strategies for small business owners. Now, with the refusal to adjust the $500,000 small business deduction for inflation and the new capital gains tax structure, it’s clear that the government’s focus is on pushing business owners to disperse profits akin to regular salaried employees.

For smaller businesses making under $250,000 in profit, the strategy might still involve paying out salaries or employing legal income-splitting tactics. This approach maximizes RRSP contributions and sets up a favorable baseline for CPP benefits, which remains advantageous under the new tax regime.

However, for larger estates or substantial investment portfolios, the implications are stark. Consider a hypothetical scenario where a well-off elderly couple has accrued significant assets. Upon their passing, the estate could face a dramatically higher tax bill under the new rules, compared to the current system.

In light of these changes, the response from the business community and wealthier individuals will be pivotal. Will this lead to increased asset movement overseas, or a strategic holding of assets in anticipation of a possible tax rollback by a future government?

Despite the tougher stance on capital gains, the budget wasn’t all gloom for business owners. Measures like carbon tax rebates and a new Canadian Entrepreneurs’ Incentive could offset some of the financial impacts, albeit selectively.

As the landscape shifts, staying informed and proactive in tax planning will be crucial for Canadians, especially those with substantial assets or business interests.