2024 federal budget

Measures for individuals

Capital gains inclusion rate

Currently, the capital gains inclusion is 50%, where one-half of any capital gain is taxable, while the remaining 50% is tax free. Budget 2024 proposes to increase the capital gains inclusion rate from one-half to two-thirds for corporations and trusts. The same increase would apply to the portion of capital gains realized by individuals in the year that exceeds $250,000. Changes to the inclusion rate would apply to capital gains realized on or after June 25, 2024.

The $250,000 threshold would effectively apply to capital gains realized by an individual, either directly or indirectly via a partnership or trust, net of any:

• Current year capital losses.
• Capital losses of other years applied to reduce current-year capital gains.
• Capital gains in respect of which the Lifetime Capital Gains Exemption, the proposed Employee Ownership Trust Exemption or the proposed Canadian Entrepreneurs’ Incentive is claimed.

The employee stock option deduction would be limited to one-third of the taxable benefit, reflecting the new capital gains inclusion rate. However, a deduction of one-half of the taxable benefit (up to a combined limit of $250,000 for both employee stock options and capital gains) would continue to be available.

The annual $250,000 threshold for individuals would not be pro-rated for 2024.

It’s important to note that selling a principal residence will continue to be exempt from capital gains taxes.

Planning point: in situations where the higher capital gains inclusion rate would apply, there may be tax planning opportunities available to spread capital gains over multiple years to stay under the $250,000 annual threshold for individuals.  

Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) is a parallel tax calculation that allows fewer tax credits, deductions and exemptions than under the ordinary personal income tax rules. Taxpayers pay either regular tax or the AMT, whichever is highest. Last year’s budget revamped the AMT by proposing increases to the tax rate and broadening the scope of the AMT.

Changes to the AMT proposals made in this budget include:

• Allowing individuals to claim 80% of the charitable donation tax credit (from the previously proposed 50%).
  
• Allowing deductions for the Guaranteed Income Supplement, social assistance and workers’ compensation payments.
• Fully exempting Employee Ownership Trusts from the AMT.
• Permitting certain disallowed credits under the AMT to be eligible for the AMT carry-forward (that is, the federal political contribution tax credit, investment tax credits and the labour-sponsored funds tax credit).
• An exemption for AMT for certain trusts for the benefit of Indigenous Groups.

Planning point: the change to AMT with respect to charitable donation tax credits is a positive change for Canadians planning large donations to charity. It’s important to note that no amendments are made to the previously announced change to in-kind charitable donations, where for AMT purposes, the inclusion rate is still proposed to be 30%.

Home Buyers’ Plan

The Home Buyers’ Plan (HBP) is a program for first-time homebuyers in Canada. It allows first-time homebuyers to withdraw funds from their RRSP to buy or build a first home, for either themselves or for a family member with a disability. Funds withdrawn under the HBP need to be paid back into an RRSP over a 15-year period.

The 2024 federal budget proposes to increase the Home Buyers’ Plan limit from $35,000 to $60,000, starting with withdrawals made after budget day. In addition, to further help recent and upcoming first-time homebuyers, this budget proposes to allow Canadians making withdrawals from their Home Buyers’ Plan between January 1, 2022 and December 31, 2025, to have their repayment grace period extended from two years to five years.

Employee ownership trusts (EOTs)

Budget 2023 proposed tax rules to facilitate the creation of employee ownership trusts (EOTs). The 2023 Fall Economic Statement proposed to exempt the first $10 million in capital gains realized on the sale of a business to an EOT from taxation, subject to certain conditions.

Budget 2024 provides further details on the proposed exemption and outlines required conditions, including residency requirements for beneficiaries of the EOT, meeting a 50% test for assets used in the active business, and other criteria. If multiple individuals dispose of shares to an EOT and meet the conditions, they may each claim the exemption, however the total exemption cannot exceed $10 million. The individuals would need to agree on how to allocate the exemption.

It’s important to note that there may be events within 36 months after the sale to the EOT which may disqualify the taxpayer from claiming the exemption, for example, if the EOT loses its status as an EOT, or if more than 50% of the assets are no longer used in the active business. For AMT purposes, capital gains exempted through this measure would be subject to an inclusion rate of 30%, similar to the treatment for gains eligible for the lifetime capital gains exemption.

These measures would apply to qualifying dispositions of shares that occur between January 1, 2024 and December 31, 2026.

Disability Supports Deduction

The Disability Supports Deduction (DSD) allows individuals who have an impairment in physical or mental functions to deduct certain expenses that enable them to earn business or employment income, or to attend school.

Starting in 2024, this budget proposes to expand the list of expenses recognized under the DSD, specifically for individuals with severe and prolonged impairment in physical functions, impairments in physical or mental functions and vision impairments. It also proposes that expenses for service animals be included under the DSD. However, taxpayers will be able to choose whether the expense would be included in a medical expense tax credit claim, or as a DSD.

Measures for businesses

Lifetime Capital Gains Exemption

The Lifetime Capital Gains Exemption (LCGE) allows individuals to be exempt from taxes on capital gains realized on the disposition of qualified small business corporation (QSBC) shares and qualified farm or fishing property (QFFP).

The 2024 federal budget proposes to increase the LCGE from $1,016,836 to $1.25 million for dispositions on or after June 25, 2024. Indexation of the exemption amount will resume in 2026 and future years.

Canadian Entrepreneurs’ Incentive

The 2024 federal budget proposes to introduce the Canadian Entrepreneurs’ Incentive (CEI) to reduce the capital gains inclusion rate by one-half on the disposition of qualifying shares by an eligible individual, starting on January 1, 2025. The lifetime limit for this incentive would be phased in by increments of $200,000 per year, from January 1, 2025 to January 1, 2034, reaching the maximum limit of $2 million.

If the individual is subject to the two-thirds capital gains inclusion rate proposed in the 2024 budget, this incentive would reduce the inclusion rate to one-third on disposition of qualifying shares. This measure would apply in addition to any available lifetime capital gains exemption.

Accelerated Capital Cost Allowance

Taxpayers may claim a deduction under the Capital Cost Allowance (CCA) rules for the capital costs incurred to purchase certain depreciable property. The 2024 federal budget proposes to increase the CCA rate allowed for new eligible purpose-built rental housing from 4% to 10%.

To qualify, the property construction must begin after April 15, 2024 and before January 1, 2031. In addition, the property must be available for use before January 1, 2036.

Canada Carbon Rebate for Small Businesses

The budget proposes to introduce a new Canada Carbon Rebate for Small Businesses where eligible corporations will receive an automatic refundable tax credit directly in proportion to the number of employees in each applicable province.

The tax credit for the 2023 taxation year would be available to eligible corporations that file their 2023 tax return by July 15, 2024.