On April 16, 2024, the government of Canada released their budget. There were some significant changes presented from a personal and corporate perspective. Below are some key highlights (the full budget can be viewed here):

PERSONAL TAX PROPOSALS

Capital Gains Inclusion Rate

The change in the budget that has been mostly talked about is the new capital gains inclusion rate.

Budget 2024 proposes to increase the capital gain inclusion rate from 1/2 to 2/3 for capital gains realized on or after June 25, 2024.

Corporations and trusts: New 2/3 rate applies to all capital gains realized
Individuals: Existing ½ rate applies to capital gains realized up to $250,000 in the year and the new ⅔ rate applies to the portion of capital gains realized over $250,000.

The $250,000 threshold is calculated net of current year capital losses, carryforwards and carrybacks, capital gains that qualify for CGE, and the new Canadian Entrepreneurs Incentive.

Previous to this change, the capital gain inclusion rate (whether personal or corporate) was ½ (i.e. 50%). This means that ½ the capital gain would be included in income and taxed at the corresponding tax bracket. The other ½ would not be taxed.

This change is a major shift from a tax perspective because for corporations and trusts, 66.67% of any capital gain will be included in income. And individuals will have to include 66.67% of the capital gain (in excess of $250,000) into income. Only 33.33% is now not taxed (compared to 50%).

The budget also proposes to change the employee stock option benefit deduction.

If the combined stock option benefits and capital gains realized in the year:

Is $250k or less: Deduction remains 50%
Exceeds $250k: Deduction reduced to 33.3% on excess portion

Lifetime Capital Gains Exemption (LCGE)

The current LCGE limit for 2024 is $1,016,836 on dispositions of shares of a “qualified small business corporation” (QSBC) or “qualified farm or fishing property” (QFFP)

Budget 2024 proposes to increase the limit to $1,250,000 for dispositions that occur on or after June 25, 2024.

This is good news as a sale with a gain of $1,250,000 exempts you from tax ($1,016,836 before the change) should your shares qualify.

For more information on what the LCGE is, read our blog post HERE.

Canadian Entrepreneurs’ Incentive (CEI)

Budget 2024 proposes to introduce the CEI effective January 1, 2025, which will reduce the taxes on capital gains from the disposition of shares by eligible individuals

The CEI reduces the CG inclusion rate on certain share dispositions by 50%. That being said, one must meet many prescribed conditions (outlined below).

There is a lifetime limit of $2M capital gains per individual (phased in by increments of $200,000 per year between 2025 and 2034). The CEI is in addition to any available CGE, but how they interact is still unclear.

CEI Prescribed Conditions

The shares sold must be:

Shares of a “small business corporation” (SBC), and
Owned directly by the seller individual.

Throughout preceding 24 months,

The company must be a CCPC, and
More than 50% of the FMV of the company’s assets must be attributable to:

Assets used principally in an active business carried on primarily in Canada by the CCPC (or a related company), or
Share and debts of a “connected” corporation, or
A combination thereof.

The individual must be a “founding investor” when the company was “initially capitalized”
The individual must hold the shares for a minimum of five years before selling
At all times since initial share subscription, the individual must directly own shares representing >10% of the votes and value of all shares of the company
Throughout 5-year period before sale, the individual must be engaged in the company’s business on a regular, continuous and substantial basis
The share cannot be a direct or indirect investment in any of the following:

A professional corporation
A corporation whose principal asset is the reputation or skill of an employee
Corporation carrying on business in the financial, insurance, real estate, food, accommodation, arts, recreation, entertainment, consulting or personal care sectors

The share must be acquired for FMV consideration

Alternative Minimum Tax (AMT)

Budget 2023 proposed massive changes to AMT. 2023 proposals are effective Jan. 1, 2024, but are still not yet passed. One of these proposals is to limit the charitable donation tax credit claim to only 50%.

Budget 2024 proposes to revise some 2023 proposals with a key change being the ability to claim 80% of charitable donation tax credits. Budget 2024 proposals retroactively effective to Jan. 1, 2024.

Employee Ownership Trust (EOT)

Budget 2023 proposed rules to facilitate the creation of EOTs. The 2023 Fall Economic Statement proposed to exempt the first $10M of capital gains realized on the sale of a business to an EOT, subject to certain conditions.

Budget 2024 provides details on these conditions:

EOT-exempt capital gains will be subject to a 30% inclusion rate for AMT purposes
Applies to qualifying share dispositions that occur between Jan. 1, 2024 to Dec. 31, 2026

Home Buyers’ Plan (HBP)

The current rules under the HBP are as follows:

Withdrawal limit from an RRSP is $35,000
Taxpayers have up to 15 years to repay to the RRSP
Repayment period starts the 2 years after the year when first withdrawal is made

Budget 2024 proposes the following for qualifying withdrawals made after April 16, 2024:

Increase the withdrawal limit from an RRSP to $60,000
Temporarily extend the repayment period by 3 years, to a total of 5 years

CORPORATE TAX PROPOSALS

Accelerated CCA

Budget 2024 proposes a 100% CCA deduction in the first year for the following assets if acquired after April 15, 2024, and becomes available for use before Jan 1, 2027:

Class 44: Patents and related rights for a limited or unlimited period
Class 46: Data network infrastructure equipment and related systems software
Class 50: General-purpose electronic data-processing equipment and systems software

Budget 2024 proposes 10% CCA deduction for certain purpose-built rental projects that begin construction after Apr 15, 2024 and before Jan 31, 2031, and are available for use before Jan 1, 2036.

Bankrupt Corporations

Currently, bankrupt corporations are exempt from the debt forgiveness (DF) rules

The DF rules reduce tax attributes (e.g. losses) of the debtor by the forgiven amount (FA). 50% of the FA is included in the debtor’s income for tax purposes.
For bankrupt corporations, losses expire and cannot be deducted, but DF rules don’t apply

Budget 2024 proposes to apply the DF rules to bankrupt corporations effective April 16, 2024

Losses will no longer expire and can be used to offset the FA
Effectively, bankrupt corporations will be treated the same as regular corps for DF purposes

Other Corporate Tax Measures

Clean Electricity ITC: To apply this 15% tax credit to certain eligible property
Clean Technology Manufacturing ITC: To propose adjustments for polymetallic projects
EV Supply Chain ITC: To introduce a new 10% ITC for certain EV supply chain segments

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