On June 24, 2024, significant changes to the capital gains rules in Canada will be implemented, impacting both individuals and corporations. These changes aim to provide more favorable tax treatments for certain qualified properties, including qualified farm property, while also negatively adjusting the income inclusion rates for capital gains.
Understanding these changes is crucial for taxpayers, particularly those involved in the agriculture and small business sectors. Our tax team has analyzed the new regulations to help you navigate the complexities and optimize your tax strategies. The purpose of this summary is to expand on our previous communications about these changes and identify implications specific to the Agricultural sector.
Positive Changes to Capital Gains
- Capital gains exemptions of qualified farm property will increase from $1 million to $1.25 million as of June 25, 2024, with that limit promised to grow with inflation.
- Farming corporations might also qualify for the “Canadian Entrepreneurs’ Incentive”, on which certain capital gains would have an income tax inclusion of only one-third. This incentive has a lifetime limit that is being phased in by increments of $200,000 per year, beginning on January 1, 2025, stopping at $2 million for dispositions in 2034 or later. (Legislation governing this incentive has yet to be released.)
- The changes in “alternative minimum tax” will often result in less temporary taxes on the sale of qualified farm property.
Negative Impacts of New Capital Gains Rules
- Corporate capital gains (such as the sale of land owned by farm corporations) will have their income inclusion increased from one-half to two-thirds; this also results in less tax-free funds (the “capital dividend account”) available, from one-half to one-third of the resulting capital gain.
- Personal capital gains in excess of (or that don’t qualify) for the capital gains rules or the Canadian Entrepreneurs’ Incentive are only eligible for one-half income inclusion on the first $250,000, with any remaining capital gains being two-thirds taxable.
Opportunities and Strategies Under New Capital Gains Rules
- The “intergenerational” transfer of qualified farm property is still possible, where certain assets can be transferred to or inherited by the next generation without tax.
- The capital gains reserve rules allow certain taxable transactions to be brought into income over as much as ten years, which creates great flexibility for managing alternative minimum tax and old age security.
- Recent legislative changes have made possible the sale of shares of a farming corporation to the next generation in a way that preserves capital gains treatment and allows for the next generation to use corporate funds to pay for the purchase.
Conclusion
The increased exemption for qualified farm property and the Canadian Entrepreneurs’ Incentive offer significant tax benefits in applicable situations, however, the higher income inclusion rates for corporate and personal capital gains require careful planning. Despite these challenges, strategies like intergenerational transfers and the capital gains reserve rules continue to provide valuable flexibility for Agricultural Producers
If you believe your farm or business may be impacted by these changes, we encourage you to get in touch with one of our advisors. Contact our Agriculture team today to ensure you are fully compliant and strategically positioned to maximize tax efficiencies for your operation within the new regulations.
Further Reading:
New Legislation Released Increasing Capital Gains Inclusion Rate in Canada (June 10, 2024)
Capital Gains Tax Changes: Do You Need to Take Action? (April 2024)
