In addition to the 2024 Federal Budget summary provided we want to provide more detailed information and commentary on the effects of the capital gain inclusions rate increase and some potential planning opportunities.
Capital Gains Tax Increase
Under the current rules, capital gains earned in a corporation are included in income at 50% and when you extract the cash out to yourself personally, the highest effective rate in Saskatchewan is 26.34% Saskatchewan. With the proposed change announced in the 2024 federal budget, capital gains earned in a corporation will now be included in income at 66.67% and this increases the highest effective tax rate in Saskatchewan to 35.13%. This change is anticipated to be effective for capital gains realized on or after June 25, 2024.
The 2024 federal budget also proposes changes to the taxation of capital gains for individuals. They propose to increase the capital gains inclusion rate to 66.67% for individuals who realize capital gains in excess of $250,000 (in any calendar year) on or after June 25, 2024. The first $250,000 continues to be included in income at 50% but anything above that $250,000 threshold would be included in income at the new 66.67% inclusion rate.
Capital Gains Exemption Increase
They also propose to increase the lifetime Capital Gains Exemption (CGE) from $1,016,836 to $1,250,000, effective for gains realized on eligible property on or after June 25, 2024.
These changes may create situations where it may make sense to consider the timing of the realization of capital gains, either through the actual sale of assets or through a crystallization transaction. Situations to consider would include, but are not limited to, the following:
- A planned sale within the next two to three years
- Significant accrued gains in situations where a deemed disposition would be triggered upon the passing of an individual
- The use of the capital gains exemption on a sale in 2024
- Anticipated emigration from Canada within the next two to three years
Inherent gains on property eligible for the CGE – qualified small business corporation shares or qualified farm property – creates a unique situation where accelerated realization of the gain would allow for the lower individual capital gain inclusion rate but not the increased CGE limit.
Capital Gains Scenarios to Consider
To illustrate this impact, we’ll provide a few scenarios showing the various taxable income calculations, assuming the full lifetime capital gains exemption is available and usable in each circumstance:
Scenario 1 – $1,250,000 capital gain
- If before June 25, 2024 – taxable income of $116,582.
- If after June 24, 2024 – taxable income of $0.
Scenario 2 – $1,600,000 capital gain
- If before June 25, 2024 – taxable income of $291,582.
- If after June 24, 2024 – taxable income of $191,667.
Scenario 3 – $3,000,000 capital gain
- If before June 25, 2024 – taxable income of $991,582.
- If after June 24, 2024 – taxable income of $1,125,000.
Capital gains eligible for the CGE greater than approximately $2,200,000 will pay less tax if realized prior to June 25, 2024. Capital gains eligible for the CGE between $1,016,836 and $2,200,000 will incur less tax by deferring the sale date until after June 25, 2024.
Crystallization transactions create taxable events to bump asset cost bases without any actual cash coming in. Therefore the tax is owed but no cash is generated to cover it. These types of transactions will be most useful when a sale is locked in or highly likely to occur shortly after the rule change date given the cash crunch involved and the cost of potentially accelerating the tax owing.
As the proposed changes to the taxation of capital gains don’t take effect until June 25, 2024, there is some, but limited, time for planning to efficiently minimize income tax. If you have significant unrealized gains or are planning a sale in the short term, please reach out to your Virtus Group advisor to discuss what options are available.
