The 2024 Federal Budget1 ("Budget 2024") released on April 16, 2024, proposes to increase the capital gains inclusion rate ("CGIR") from one-half to two-thirds and to effect a one-time increase to the lifetime capital gains exemption ("LCGE"), and introduces a reduced CGIR for certain dispositions of qualified shares by an individual, referred to as the Canadian Entrepreneur's Incentive ("CEI").
Proposed Changes
Increase to Capital Gains Inclusion Rate Paragraph 38(a) of the Income Tax Act (Canada)2 provides that, with certain exceptions, one-half of the capital gain3 from the disposition of property is included as a taxable capital gain in a taxpayer's income. A taxpayer's capital gain is generally the amount by which the "proceeds of disposition"4 in respect of "capital property"5 exceeds the total of the "adjusted cost base"6 of the capital property and any outlays or expenses to the extent that they were made or incurred by the taxpayer for the purposes of making the disposition7. Capital expenses in respect of capital property contemplated in paragraph 18(1)(d) are included in the adjusted cost base of property for the purposes of calculating a capital gain on the disposition of the property.
Budget 2024 proposes to increase the CGIR from one-half to two-thirds for corporations and trusts, and from one-half to two-thirds on the portion of capital gains realized in the year that exceed $250,000 for individuals, and in each case for capital gains realized on or after June 25, 2024.8
The $250,000 threshold will 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; and
- capital gains in respect of which the LGCE, the proposed Employee Ownership Trust ("EOT") exemption9 or the proposed CEI is claimed.
Employees who claim the employee stock option deduction would be provided a one-third (instead of one-half) deduction of the taxable benefit to reflect the new CGIR, but would be entitled to a deduction of one-half the taxable benefit up to a combined annual limit of $250,000 for both employee stock options and capital gains.
Net capital losses realized in years prior to change to the CGIR would continue to be deductible against taxable capital gains realized after the rate change by adjusting the value of such losses to reflect the inclusion rate of the capital gains being offset. Accordingly, a capital loss realized prior to the rate change would fully offset an equivalent capital gain realized after the rate change.
For tax years that begin before and end on or after June 25, 2024, two different inclusion rates would apply. As a result, transitional rules will need to separately identify capital gains and losses realized before the effective date (Period 1) and those realized on or after the effective date (Period 2). For example, taxpayers would be subject to the higher inclusion rate in respect of the portion of their net gains arising in Period 2 that exceed the $250,000 threshold, to the extent that these net gains are not offset by a net loss incurred in Period 1 or any other taxation years.
The annual $250,000 threshold for individuals would be fully available in 2024 (i.e. it would not be prorated) and would apply only in respect of net capital gains realized in Period 2.
Budget 2024 states that other consequential amendments would also be made to reflect the new inclusion rate, and that additional design details will be released in the coming months.
Alternative Minimum Tax ("AMT")
Budget 2024 contains significant amendments to the AMT, in addition to those amendments to the AMT proposed in Federal Budget 202310 and the legislative proposals released with it11, and the further legislative proposals released in August 202312. Budget 2024 does not alter the 100% inclusion rate in "adjusted taxable income" for capital gains applicable from and after January 1, 2024, proposed in Federal Budget 2023.
Lifetime Capital Gains Exemption ("LCGE")
Subsections 110.6(2) and 110.6(2.1) currently provide an individual with a LGCE for capital gains realized on the disposition of a qualified farm or fishing property or qualified small business corporation shares, as the case may be. The amount of the LCGE for qualified small business corporation shares is currently $1,016,836 in 2024 and is indexed to inflation.
Budget 2024 proposes to increase the LCGE to apply to up to $1.25 million of eligible capital gains, and applicable to dispositions that occur on or after June 25, 2024.13 Indexation of the LCGE for inflation would resume in 2026.
Canadian Entrepreneurs' Incentive ("CEI")
Budget 2024 proposes to introduce the CEI.14 The CEI would provide for a 50% reduction of the prevailing CGIR for capital gains realized on the disposition of qualifying shares by an eligible individual, reducing a two-thirds inclusion rate (for dispositions on and after June 25, 2024) to one-third, and a one-half inclusion rate (for dispositions prior to June 25, 2024, and dispositions by individuals after June 25, 2024, which are eligible for the 50% inclusion rate).
An individual could claim the CEI and the LGCE on a qualifying disposition. The CEI would be limited to $2 million in capital gains realized by the individual over their lifetime, and, unlike the LGCE, would not be indexed to inflation. The CEI lifetime limit of $2 million would be phased in by increments of $200,000 per year, beginning on January 1, 2025, before ultimately reaching a value of $2 million by January 1, 2034.
A share of a corporation would be a "qualifying share" if it meets the conditions for the LGCE, and also meets the following conditions:
- The claimant was a founding investor at the time the corporation was initially capitalized and held the share for a minimum of five years prior to disposition.
- At all times since the initial share subscription until the time that is immediately before the sale of the shares, the claimant directly owned shares representing more than 10 per cent of the fair market value and votes attaching to all of the shares of the corporation.
- Throughout the five-year period immediately before the disposition of the share, the claimant must have been actively engaged on a regular, continuous, and substantial basis in the business of the corporation.
- The share does not represent a direct or indirect interest in a
professional corporation, a corporation whose principal asset is
the reputation or skill of one or more employees, or a corporation
that carries on certain types of business, including a business:
- operating in the financial, insurance, real estate, food and accommodation, arts, recreation, or entertainment sector; or
- providing consulting or personal care services.
- The share must have been obtained for fair market value consideration.
The CEI would apply to dispositions that occur on or after January 1, 2025.
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Footnotes
1. See https://budget.canada.ca/2024/home-accueil-en.html.
2. All statutory references are to the provisions of the Income Tax Act (Canada), unless otherwise stated.
3. Defined in paragraph 39(1).
4. Defined in section 54.
5. Defined in section 54.
6. Defined in section 54.
7. See paragraph 40(1)(a).
8. See https://www.canada.ca/en/department-finance/ news/2024/04/tax-fairness-for-every-generation.html and https://budget.canada.ca/2024/report-rapport/tmmf-en.html#a6.
9. Proposed in Federal Budget 2023 for transactions which occur after December 31, 2023. Initial draft legislation to facilitate creating EOTs was introduced in the 2023 Federal Budget. After consultation, changes to the EOT rules were made in draft legislative proposals released on August 4, 2023, and in Bill C-59, Fall Economic Statement Implementation Act, 2023. Budget 2024 provides additional details on the EOT rules that were not included in the Fall Economic Statement 2023 or Bill C-59.
10. See https://www.budget.canada.ca/2023/home-accueil-en. html.
11. See https://www.budget.canada.ca/2023/report-rapport/nwmm-amvm-01-en.html.
13. See note 8, above.
14. See note 8, above.
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