This document assesses the key 2024 Federal Budget provisions, as well as strategies for dealing with their investment implications. Importantly, the Budget has yet to become law, so our evaluation is provisional. Regardless, we suggest that investors discuss potential financial planning strategies with their tax and legal advisors before taking action.
2024 Budget Highlights
The 2024 Federal Budget 2024 proposes the following changes:
Importantly, the Budget did not propose changes to the following items:
• Personal income tax rates.
• Corporate income tax rates.
• The Principal Residence Exemption.
Tax Planning Tips
We have always believed that the “tax tail should not wag the investment dog.” That said, in certain circumstances it makes sense to optimize tax strategy. Regardless, we strongly suggest that clients seek advice from their tax and legal advisors before undertaking any tax planning strategies.
Key considerations:
• Time horizon is critical. Investors need to consider how long they plan to hold an investment, their expected rate of return and whether they expect to be subject to the higher inclusion rate in the year they plan to sell the investment. In general, the longer someone plans to hold an investment, and the higher the rate of return they expect the less sense it makes to sell earlier than planned, even providing for a lower inclusion rate. This is because an earlier-than-planned realization of a capital gain is a prepayment of tax, leaving fewer dollars available for investment. In addition, it is possible future government repeal or reduce these onerous increases to capital gains taxes.
That said, if someone plans to sell an investment in the next two or three years, and they believe the gain on the eventual sale would be subject to the higher inclusion rate, they might benefit from lightening up before June 25. A person can trigger a capital gain after any of three life events: when they sell an appreciated property, on the deemed disposition of property if they leave Canada, and on the deemed disposition of property on death.
• Size of capital gains. Most individual investors do not typically generate $250,000 in capital gains in a year on portfolio investments held personally, meaning there would be little benefit to triggering gains earlier than originally intended. That said, for investors with personal capital gains well in excess of $250K it may make sense to strategically sell assets every year so capital gains never exceed the $250K threshold, assuming a relatively short time horizon.
• Structure. Investors who hold investments in a corporation will lose access to the 50% inclusion rate as of June 25. So, corporate investors may look to move assets to a personal name as opposed to a corporate name. Trusts will also lose access to the 50% inclusion rate, so if a trust is close to the end of its 21-year lifetime, it may also make sense to crystallize gains before June 25th. That said, we have come across research suggesting that it may be possible for select trusts to extend their lifetime beyond 21 years if certain conditions are met.
• Specialized vehicles. Northland has access to several vehicles that may help optimize tax efficiency. For instance, there may be the possibility of performing an asset swap from existing investments into alternative asset funds without triggering capital gains. Life insurance may also be used for estate planning by moving taxable funds into a tax-sheltered vehicle for a more tax-efficient transfer of wealth.
There may also be the possibility of obtaining non-cash capital gains crystallization on some real estate funds (such as Centurion REIT) if instructions are received quickly enough. That said, according to Centurion management, since the capital gains tax would be payable in 2025, investors would probably be better off not doing the crystallization and paying the higher capital gains tax down the road if they plan to hold their investments for at least 3-4 years.
Cottages. Owners of multiple residences may need to carefully strategize how to allocate the principal residence exemption in the future. There are several potentially worthwhile strategies for dealing with secondary residences such as cottages that we will explore with one of Canada’s leading tax experts on an upcoming Northland - The Artisan Podcast.
Alternative Minimum Tax (AMT) Impact. The 2023 budget increased the AMT capital gains inclusion rate from 80% to 100% and bumped up the AMT rate from 15% to 20.5%. As such, crystallizing significant capital gains before June 25, 2024 may have the inadvertent consequence of triggering AMT, which has a higher effective tax rate on capital gains (20.5% versus 16.5% in 2024 for most of our investors). After June 24, 2024 triggering AMT from realizing capital gains is less of a risk because of the jump in the capital gains inclusion rate more generally.
Key Provisions of the 2024 Budget
Below is a summary of the most significant tax and wealth planning measures unveiled in the 2024 Budget.
Capital Gains Inclusion Rate
The Budget proposes to increase the capital gains inclusion rate from 50% to 66.67% for corporations and trusts, and for individuals on capital gains exceeding $250,000, if realized on or after June 25, 2024. For individuals, the $250,000 threshold applies to net capital gains realized directly, or indirectly through partnerships or trusts, after deducting current year and prior year capital losses.
Prior years' net capital losses can offset current year taxable capital gains, adjusted for the new inclusion rate. Transitional rules apply for tax years spanning before and after June 25, 2024, with two different inclusion rates based on the realization date of gains and losses. And the $250,000 threshold for individuals applies fully in 2024 for net capital gains realized on or after June 25.
For employee stock options, the Budget also proposes an increase in the gains inclusion rate from 50% to 66.67% for any option benefit exceeding $250K in a given year.
Lifetime capital gains exemption (LCGE)
The LCGE applies to the disposition of qualified small business corporation shares or qualified farm or fishing property. The Budget proposes to increase the LCGE from $1,016,836 to $1.25 million. This increase would apply to dispositions that occur on or after June 25, 2024. The LCGE will resume indexation to inflation in 2026.
Canadian Entrepreneurs’ Incentive
The Entrepreneurs’ Incentive is a new measure that halves the prevailing inclusion rate on up to $2M of lifetime capital gains per individual on the sale of a qualifying business by eligible individuals. Under the proposed inclusion rate of 66.67%, qualifying dispositions would face an inclusion rate of 33.33%, in addition to any existing capital gains exemption. The lifetime limit would incrementally increase by $200,000 annually starting January 1, 2025, reaching $2 million by January 1, 2034. This incentive applies to dispositions occurring on or after January 1, 2025.
A share qualifies if certain conditions are met, including, but not limited to:
• Direct ownership by the individual shareholder at the time of sale.
• Meeting specific asset tests as a Canadian-Controlled Private Corporation in the 24 months before the sale.
• Shareholder is a founding investor, holding the shares for at least five years before sale.
• Active engagement in the business for at least five years before the sale.
• Acquisition for fair market value consideration.
However, this incentive does not apply to the following: a professional corporation; a corporation whose principal asset is the reputation or skill of one or more employees; or a corporation that carries on certain types of businesses operating in the financial, insurance, real estate, food and accommodation, arts, recreation, or entertainment industry; or providing consulting or personal care services.
Employee Ownership Trust (EOT) Tax Exemption
An EOT is a trust that holds shares of a corporation for the benefit of the corporation’s employees. Instead of selling the shares of a corporation to the employees (who may not be able to pay for them), the business owner could sell the shares to an EOT. Individuals selling shares to an EOT can claim an exemption of up to $10M, subject to certain conditions. The 2024 budget provides additional details on this policy such as extending the exemption to sales to worker cooperative corporations. Gains eligible for this exemption are subject to a 30% inclusion rate for AMT purposes. This measure applies to qualifying dispositions occurring between January 1, 2024, and December 31, 2026.
Alternative Minimum Tax (AMT)
The AMT provides an alternate tax calculation, allowing fewer deductions than ordinary income tax rules. Taxpayers pay either regular tax or AMT, whichever is higher. The Budget recommends changes to the AMT, affecting taxation years starting on January 1, 2024. The proposed changes include:
• Allowing individuals to claim 80% (instead of the previously proposed 50%) of the charitable donation tax credit when calculating AMT.
• Allowing deductions for the Guaranteed Income Supplement (GIS), social assistance, and workers’ compensation payments.
• Allowing individuals to fully claim the federal logging tax credit under the AMT.
• Exempting EOTs (see above) from the AMT.
• Allowing certain disallowed credits under the AMT to be eligible for the AMT carry-forward (i.e., the federal political contribution tax credit, investment tax credits, and labour-sponsored funds tax credit).
Crypto-Asset Reporting Framework (CARF)
The Budget suggests adopting the CARF developed by the OECD. Essentially, CARF will mandate that Canadian residents and entities conducting business in Canada, report specific Crypto-Assets transactions to Revenue Canada. Along with transaction reporting, service providers must gather and report customer information such as name, address, date of birth, residence jurisdiction(s), and taxpayer identification numbers. For non-natural entities, the same details apply to those in control.
Essentially, Crypto-Assets will soon face similar reporting standards as financial accounts. Although draft legislation has yet to be released, the change is anticipated for 2026 onwards. While transparency is generally valued, this may prompt privacy-conscious crypto holders to move assets to offshore exchanges or cold wallets, making it challenging for Canadian authorities to track.
These amendments would apply to taxation years that begin on or after January 1, 2024.
Housing Incentives
There are also several Budget proposals designed to improve housing affordability, namely:
Home Buyer’s Plan
The Budget proposes raising the withdrawal limit of the Home Buyers’ Plan from $35,000 to $60,000 for withdrawals made after April 16, 2024. Additionally, the start of the 15-year repayment period for participants making their first withdrawal between January 1, 2022, and December 31, 2025, would be temporarily deferred by three years.
Accelerated Capital Cost Allowance (CCA) for Purpose-built Rental Housing
The budget provides an accelerated CCA of 10% for new, eligible purpose-built rental projects that begin construction after April 15, 2024, but before January 1, 2031, and are available for use before January 1, 2036.
Eligible property will be new purpose-built rental housing that is a residential complex:
• with at least four private apartment units, or 10 private rooms or suites, and
• in which at least 90% of residential units are held for long-term rental.
Accelerated CCA will not apply to renovations of existing residential complexes, but new additions to an existing structure will be eligible. Projects that convert existing non-residential real estate into a residential complex will also be eligible.
Interest Deductions on Purpose-Built Rental Housing
The Budget proposes an exemption from the excessive interest and financing expenses limitation (EIFEL) rules for arm’s length financing that is used to build or acquire certain purpose-built rental housing located in Canada. This exemption will be effective for taxation years beginning after September 30, 2023 for expenses incurred before January 1, 2036.
Taxing Vacant Lands to Incentivize Construction
The government is concerned that some landowners are holding residentially zoned vacant land as a speculative investment. The budget announces that the government will consider introducing a new tax on residentially zoned vacant land to spur development. It will launch consultations later this year.
Limiting the Financialization of Housing
The budget announces the government’s intention to restrict the acquisition of existing single-family homes by very large corporate investors. The government will consult in the coming months and provide further details in the 2024 Fall Economic Statement.
If you have questions on any of the issues in this article, please do not hesitate to contact your advisor.
* This publication is intended for informational purposes only and is not intended to constitute investment, financial, legal or tax advice. It does not consider your particular situation and is not intended to be a recommendation. We are not tax or legal advisors and individuals should consult with their own tax and legal advisors regarding their particular circumstances before taking any action based upon the information contained in this publication. Every effort has been made to ensure that the material is correct at time of publication, but we cannot guarantee its accuracy or completeness. Neither Northland Wealth Management, nor any of its affiliates, make any representations or warranties, express or implied, as to the accuracy or completeness of such material and disclaim any liability resulting from any direct or consequential loss arising from any use of this publication or the information contained herein.