Reminder: Important Changes to Capital Gains Tax:
The 2024 federal budget introduced important changes to capital gains rates, and you should be aware of how this could impact you or your clients.
A capital gain occurs when you sell, or are deemed to have sold, a capital asset for an amount greater than its adjusted cost base plus the outlays and expenses related to the sale.
Here's a summary of some of the key measures and their high-level implications. A more detailed guide presenting various scenarios will be shared with Members in the coming weeks.
The summary provided regarding capital gains tax changes is for informational purposes only and should not be considered tax or legal advice. Always consult with a qualified professional before making any financial decisions or taking any action based on this information.
Key Federal Budget Capital Gains Measures
1. Increase in Capital Gains Inclusion Rate
Change: Effective June 25, 2024, the capital gains inclusion rate will rise from 50% to 66.67% for trusts and corporations, impacting the taxation of capital gains. For individuals, the inclusion rate will also be increased to 66.67% but applicable only on annual capital gains above $250,000. The prior 50% inclusion rate will continue to apply on annual gains below the $250,000 threshold for individuals.
One half of a capital gain is currently included in computing a taxpayer's income. This is referred to as the capital gains inclusion rate. The current one-half inclusion rate also applies to capital losses.
Impact: This adjustment means a higher portion of capital gains will be subject to income tax, potentially increasing the tax burden on real estate investments, property sales, and capital gains realized inside corporations (e.g., personal real estate corporations).
Gains on a Canadian residential property (or rights to a pre-construction residential property) held for less than one year may be deemed to be business income (i.e., 100% taxable) under the residential property flipping rule unless an exception is met.
2. Increase to Lifetime Capital Gains Exemption (LCGE) for Entrepreneurs
Change: The LCGE will increase to $1.25 million (from $1.016 million) for eligible capital gains, applicable from June 25, 2024, onward.
Impact: If you're selling shares of qualified small business corporation (QSBC) or qualified farm and fishing property (QFFP), the impact of the increase in the lifetime capital gains exemption rises to $1.25 million.
3. Alternative Minimum Tax (AMT) Adjustments
Change: Continued adjustments to AMT rules to align with changes in regular income tax calculations. 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 AMT, whichever is highest.
Impact: AMT considerations become crucial in planning for capital gains realization and charitable contributions, influencing tax planning strategies.
4. Canadian Entrepreneurs’ Incentive
Introduction: A new initiative reducing the capital gains tax rate to one-third on up to $2 million of qualifying shares, beginning in 2025. Specifically, this incentive would provide for a capital gains inclusion rate that is one half the prevailing inclusion rate, on up to $2 million in capital gains per individual over their lifetime.
Impact: While not applicable to professional corporations, this incentive promotes entrepreneurship by lowering the tax burden on qualifying share sales.
Strategic Planning Considerations
Immediate Action: Evaluate the potential benefits of realizing capital gains before June 25, 2024, to optimize tax efficiency under current rates.
Consultation: Engage with a tax advisor to navigate these changes effectively and tailor strategies to your specific financial situation.
Long-term Planning: Assess the implications for retirement planning, estate management, and future investment decisions in light of these regulatory adjustments.
As Budget 2024 reshapes tax policies affecting real estate professionals and their clients, proactive planning becomes paramount. This is just a high-level overview and TRREB strongly encourages all Members to seek expert professional advice to safeguard your financial interests amidst these evolving fiscal landscapes.
TRREB is currently preparing more detailed guidance materials that will be shared with Members in the coming weeks. In the meantime, please visit this Government of Canada site for more information.
Disclaimer: This information provides a general overview from Government of Canada information and is based on proposed legislation subject to revision. As a reminder, it does not constitute accounting, legal, or tax advice, and individual circumstances may require additional considerations not covered herein. For personalized advice, consult with a qualified professional.
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