2024 Federal Budget Capital Gains Changes
You might have heard about the 2024 Federal Budget that was proposed recently, and the main topic of discussion seems to be surrounding the change in the capital gains exclusion rate. There has been so much backlash against this proposal, misleading communication from politicians, and a downright misunderstanding of what the proposed changes entail. Today we will be covering all of this.
First, let's start with what the proposed changes are.
1. On a personal level, the government is proposing to tax capital gains over $250,000 in any given year at a 66.67% inclusion rate. This will impact very few Canadians, but where it might come into effect is when selling a cottage or rental property with a very low cost basis (original purchase price).
As an example, if you purchased a rental property at $250,000 and it is now valued at $1,000,000 when you decide to sell it, you have a $750,000 capital gain. In the old rules, a $750,000 capital gain would have a 50% inclusion rate, and you would only pay tax on half the gain. Therefore:
$750,000 @ inclusion rate of 50% = $375,000 added to your taxable income for the year.
In the new rules, the first $250,000 capital gain will still have a 50% capital gains inclusion rate, but any additional capital gain over $250,000 would have an inclusion rate of 66.67%. Let's compare to the same example above:
- First $250,000 capital gain @ inclusion rate of 50% = $125,000 in taxable income
- Next $500,000 capital gain @ inclusion rate of 66.67% = $333,500 in taxable income
- Total Taxable income of $458,500
The new rule would increase your taxable income by $83,500 in this scenario, and if you're already paying tax in a 50% bracket, this would result in approximately $42,000 in additional tax.
Keep in mind this change is only on the personal side.
2. On the incorporated business side - for any small business owner, professionals (accountants, lawyers, doctors) and any large corporations the proposed change has their capital gains inclusion rate go up to 66.67% from the first dollar - no $250,000 threshold that they are proposing on the personal side.
What this means is that taxation inside corporations becomes much worse. Check out the chart below to illustrate the changes:
*For those wondering, Net Cash Flowed to Shareholder is the CDA balanced flowed out tax free + non-eligible - personal tax (at top MTR)
Under the old rules, if your corporation triggered a $100,000 capital gain, $70,908 would flow to you as a shareholder as cash to spend. Under the new rules, this amount is reduced down to $61,211, a near 10% reduction due to additional taxes.
You can see how this causes major frustration and backlash from a large majority of Canadians. Doctors, lawyers, small business owners - all who have saved for years inside of their corporations as part of their retirement plan, now get the news that their planned retirement income just got slashed by 10% - BRUTAL.
And if that isn't enough, our government isn't even honest about how this affects Canadians. Just yesterday a video was put out claiming the proposed changes that will impact less than 1% of people. As I mentioned above, small business owners and any other corporation will be hit with increased taxation. This includes every Canadian corporation. Anyone that owns shares of a Canadian business is impacted, which is almost all Canadians as they will own some Canadian companies inside company pension plans/RRSP's etc. Other politicians have stated they think that the $250,000 threshold exists for corporations as well - which it doesn't, as the proposal currently stands.
The good news is that the proposal as it currently stands is not official and that the legislation still needs to be drafted, voted on, and receive royal assent. Even if it does come into effect, there is still the possibility that a new conservative government in 2025 could roll back the changes. All these may raise questions on whether or not you should trigger capital gains prior to June 24th, 2024. If you have questions about how this may affect you, please don't hesitate to reach out.
Best,
Jon
Jonathan Adomait
Financial Planner | CFP, CIM, B.Eng