As predicted in my Outlook for 2024, this government is continuing on its trend of asking the rich to pay their “fair share.” And as business owners, you are considered to be rich, regardless of the evidence! So, once again, your pockets are getting picked.
The MASSIVE change in this budget is the change to the capital gains inclusion rate. A capital gain happens when you sell assets or investments that have been held for the purposes of earning income, not for the purposes of being sold as part of an active business. The gain on such sale gets preferential tax treatment – it gets “included” in income at 50% of the face value of the gain. There is an exception for gains on the sale of your principle residence (which is usually tax free). So if you sell an asset for $500,000 and your tax cost was $400,000 then you gave a capital gain of $100,000. Had this been regular business income then you would have been taxed on this $100,000 of income. But because it is a capital gain it has been included at 50%, so you only get taxed on $50,000 of income. This inclusion rate has varied over the years, so changing the rate is not a new idea.
In this budget the government announced that the inclusion rate will increase to 66%. So on the example of a $100,000 gain you will now be taxed on $66,000 instead of $50,000.However, they are keeping the 50% inclusion rate for individuals on the first $250,000 of capital gain each year, so you will only pay more if you have a very large gain. But with the rise in property values (or, more importantly, the devaluation of the purchasing power of the Canadian Dollar that makes all prices go up), many people may be sitting on gains well in excess of this threshold.
But of course, the pain doesn’t end there. If you own property in a Trust or a Company then this lower rate doesn’t apply to you. Your capital gains now jump immediately to 66%. Other changes in this budget of interest to business owners are good, but minor:
- The LifeTime Capital Gains Exemption on certain sales increases to $1,250,000 starting 25 June 2024.
- Decreased capital gains inclusion rate on the sale of shares in small business will be halved. While this is a great advancement, it may be difficult to use.
- Alternate Minimum Tax (changes introduced in the 2023 budget) continue, but only minor relief.
- Canada Carbon Rebate for Small Businesses for businesses in SK, MB, ON and Maritimes is being introduced, based on the number of persons employed. Few details have been released yet.
- Accelerated CCA rates on certain rental property buildings, patents and computer equipment.
The legislation has not yet passed, so changes are still possible, but rare.
