Legal Updates April 18, 2024

Budget 2024: If I Had a (Quarter) Million Dollars

Canada’s Deputy Prime Minister and Finance Minister Chrystia Freeland tabled the 2024 federal budget on April 16, 2024, entitled Fairness for Every Generation (“Budget 2024”). Budget 2024 lays out a plan of $52.9 billion in new spending over the next five years aimed at increasing housing affordability and managing the rising cost of living. With respect to tax measures, a monumental change was proposed by increasing the amount of the capital gain to be included in income from 50% to 66 2/3%. In Ontario, the marginal tax rate on capital gains for an individual will increase from 26.76% to 35.69%. We provide below a summary of this proposed measure together with other key highlights.

 

Increase of Capital Gains Inclusion Rate

Budget 2024 proposes to increase the capital gains inclusion rate from 50% to approximately 66 2/3% for any capital gains realized on or after June 25, 2024 by individuals (either directly or indirectly through a trust or a partnership), corporations and trusts (to the extent that such capital gains are not paid or made payable to a beneficiary). For individuals, the 50% inclusion rate will continue to apply to the first $250,000 of capital gains in a taxation year but any excess will be subject to the increased rate.

 

The $250,000 threshold will be calculated net of the individual’s current year capital losses, capital loss carry-forwards and carry-backs and capital gains that qualify for the capital gains exemption, the new Canadian Entrepreneurs’ Incentive, discussed below, and the proposed exemption for dispositions to employee ownership trusts. Budget 2024 provides that the value of capital losses from previous years will be adjusted to reflect the increased inclusion rate so that such losses could fully offset capital gains realized on or after June 25, 2024.

 

This measure will also impact employees who exercise stock options. Generally, employees who exercise stock options may claim a 50% deduction in respect of the stock option benefit. Budget 2024 proposes to reduce the available deduction to 1/3 of the stock option benefit. The 50% deduction will continue to apply to the extent that the employee’s combined stock option benefit and capital gains do not exceed $250,000.

 

The government seems to view this measure as a way to tax Canada’s wealthiest as evident from its lengthy comments that the measure is expected to impact only a small percentage of taxpayers (around 40,000 individuals and 307,000 companies). We recommend that those impacted by the rules should consider tax planning opportunities to crystalize their accrued gains before the effective date of June 25, 2024, to benefit from the lower inclusion rate. The runway is short, and it is imperative for taxpayers to consult with their tax advisors to consider available tax planning opportunities.

 

Lifetime Capital Gains Exemption

When an individual earns money from the sale of qualifying shares of a Canadian business, the lifetime capital gains exemption exempts a certain amount from tax. Budget 2024 proposes to increase the lifetime capital gains exemption amount from $1,016,836 to $1,250,000 (typically the exemption amount is fixed, apart from yearly inflation indexing). This measure would apply to dispositions that occur on or after June 25, 2024. Indexing would resume commencing in 2026. Individuals who are in the process of planning a sale of qualifying shares in the near term should consult with tax advisors to determine if completing the sale on or after June 25, 2024 would result in greater tax savings.

 

Canadian Entrepreneurs’ Incentive

Budget 2024 proposes a new measure aimed at bolstering entrepreneurship in Canada by providing eligible individuals with a 1/3 capital gains inclusion rate for dispositions of qualifying shares. An eligible individual must be a founding investor at the time the corporation was initially capitalized and must hold the shares for a minimum of five years prior to the disposition. The individual must also have directly held shares from the time of initial subscription constituting more than 10% of the votes and value of the capital stock of the corporation, and must have been actively engaged in the corporation’s business on a regular, continuous and substantial basis for at least five years prior to the disposition.

 

The shares must also meet certain conditions, some of which are similar to those required to claim the lifetime capital gains exemption. The proposed measure will not be available to all businesses and notable exclusions include professional corporations, corporations in the financial, insurance, real estate, food and accommodation, arts, recreation and entertainment sectors, as well as corporations whose principal asset is the reputation or skill of one or more employees.

 

The reduced capital gains inclusion rate under this proposal would be limited to $2 million in capital gains per individual over their lifetime. The limit will be phased in by increments of $200,000 per year, beginning on January 1, 2025, until reaching $2 million by January 1, 2034.

 

This measure would apply to dispositions that occur on or after January 1, 2025.

 

Mineral Exploration Tax Credit

Budget 2024 extended the eligibility for the Mineral Exploration Tax Credit, a 15% credit designed to help exploration companies raise equity funds in addition to the regular tax deduction associated with flow-through share investments, by one year. Flow-through share agreements entered into on or before March 31, 2025, will now be eligible for the Mineral Exploration Tax Credit.

 

Crypto-Asset Reporting Framework

Budget 2024 proposes to implement the Crypto-Asset Reporting Framework (CARF), which is a framework developed by the Organisation for Economic Co-operation and Development (OECD) that provides for the automatic exchange of tax information relating to transactions in crypto-assets. This measure would require crypto-asset service providers that are resident in Canada or carry on business in Canada to annually obtain and report certain information about their customers and crypto-asset transactions. Additionally, in response to recommendations from the Global Forum on Transparency and Exchange of Information for Tax Purposes, Budget 2024 also includes proposed amendments to the Canadian rules implementing the OECD’s Common Reporting Standard (CRS), including changes relating to electronic money products and central bank digital currencies.

 

The CARF and amended CRS would apply to 2026 and subsequent calendar years with the first filings under the new rules due in 2027.

 

Alternative Minimum Tax

Budget 2024 proposes to further amend the alternative minimum tax (AMT), following the significant overhaul of the regime in the 2023 Federal Budget. These amendments appear to be in response to various policy concerns raised by the 2023 changes. Of particular note is that Budget 2024 proposes to increase the amount of a charitable donation tax credit that can be claimed when computing the AMT from 50% up to 80%, thereby reducing the AMT ‘penalty’ on charitable donations.

 

If you have any questions, please contact Mariam Al-Shikarchy at malshikarchy@wildlaw.ca, Jesse Brodlieb at jbrodlieb@wildlaw.ca, John Kutkevicius at johnk@wildlaw.ca, Richard Lewin at rlewin@wildlaw.ca, Adam Solomon at asolomon@wildlaw.ca, Marija Tasevska at mtasevska@wildlaw.ca, Emma Weiss at eweiss@wildlaw.ca or Sam Fata at sfata@wildlaw.ca.

 

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

 

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.

Wildeboer Dellelce LLP