Budget 2024 Review

Federal Budget Summary by John Baynham , CIM, CFP

As you may have heard by now, on April 16th 2024 the Federal Government released its 2024 budget. This summary will highlight some measures to help you understand what is going on and why there is so much backlash.

So what happened?

The government promised that this budget would only raise taxes on the top 0.1% wealthiest Canadians, or about 40,000 people, but after going through the proposals it would appear that this was not accurate. In its current form increased taxes will impact possibly over a million Canadians directly with higher taxes and also indirectly for anyone who invests in Canada. The Bank of Canada also declared an economic emergency this month and their concerns largely went ignored in this budget.

You are probably wondering if you will be affected, and I will break down some of the impacts in this summary. Below, I am going to separate the review into two sections; individuals, and businesses/incorporated professionals.

**You may be tempted to sell assets before the June 25th capital gain deadline. Please speak to John immediately before doing anything, because you could unintentionally subject yourself to Alternative Minimum Tax.

It is important to note that details have not yet been provided on how the measures will be implemented. We expect more in the coming months.

As a result of not having all of the information the summary below is not very technical. If you have questions, I can provide more detail

 Direct Impact to Individuals:

Capital Gains: New inclusion rate starts June 25th 2024

The capital gains inclusion rate will increase to 66% from 50% (a 32% increase) if you have capital gains over $250,000 in a single year. This results in a significant tax increase on gains over the new threshold. Fortunately for most tax years the majority of Canadians will not be subject to increased taxes, however the $250,000 is far too low for this measure to apply to only the top 0.1% wealthiest Canadians every year.

The issue is that many Canadians will have a year where they are subject to these capital gains tax increases. For example, if you and your family own a rental property or a family cottage that has substantially increased in value, those assets will likely cause you to have to pay these increased taxes at some point in the future. While you won’t have to pay the increase each year, over your lifetime you might. This could reduce retirement funds or make it more difficult to pass assets onto the next generation and presents a new unique financial planning challenge.

Upon death many people will also have to pay increased capital gains tax on their final tax returns.

It is going to be more important for spouses to do financial planning and own assets jointly in order for each person to utilize their $250,000 exemption going forward. There may be a way to utilize the $250,000 for each spouse even if the property is only in one person’s name ($500,000 total exemption), however it is more complicated and we need to wait until the government provides more technical details on the policy.

Single people will not be able to double up their exemption.

Employee Stock Options will also be impacted by the increase in the capital gains inclusion rate. Employee Stock Options are usually considered employment income with an offsetting tax credit. The tax credit will be lowered to match the new capital gain inclusion rate. This will particularly impact workers in the technology sector who often accept lower pay in exchange for increased stock options. For assets above the exemption you will have to pay over 30% more tax. Many Tech entrepreneurs are worried this will impact their ability to compete with companies in the US when hiring employees.

Trusts:

Many people use trusts for estate planning, or to help family members with disabilities. They are a versatile planning vehicle used by a lot more than the top 0.1%. The 66% capital gains rate will apply to investments in a trust and apply to all assets. There will be no $250,000 exception.

I personally think that the government did not fully think this proposal through, as this carries a lot of implications for people with disabilities, as well as for settling a deceased person’s estate. I expect that the government will provide some exceptions for specific use cases or types of trusts, like the graduated rate estate, however that is not guaranteed.

CRA:

The CRA will have increased audit powers and more penalties for non-cooperation during an audit. They also removed criminal penalties for the controversial reportable transactions rules they recently implemented.

One of the more controversial things that was added was that any required information provided to the CRA, both oral or written, be provided under oath. This seems like an overreach, as normally you would be given the opportunity to hire a professional, such as a lawyer to assist you when testifying under oath.

 Housing:

The government wants to expand the home buyers plan  allowing $60,000 to be withdrawn from  an RRSP to purchase a first home and to increase the repayment grace period to 5 years for withdrawals made between January 2022 and December 2025. They will also allow 30 year amortizations on mortgages for first time buyers of new build homes and to allow rent to be used to build credit.

It’s not uncommon for a young couple who buys their first home in the GTA to have more than $5,000 per month of housing expenses including mortgage, property taxes etc. That is $60,000 per year after tax. While the RRSP Home Buyers Plan increase would make it easier to come up with a down payment, it does not help with monthly payments. In fact, if they took advantage of the RRSP homebuyers incentive, it would add additional payments of $666 per month for a couple. These monthly repayment obligations could be quite onerous for a young family, if they even have $120,000 in their RRSP accounts to use.

30 year amortizations on mortgages are only on new builds, which is very limiting. I doubt that utilizing rent payments for credit will mean much, particularly since it can already be used in certain situations. I am skeptical that landlords will be willing to take on additional work to prepare credit reports for clients.

The government also proposed measures to help build homes. Based on what I have seen it is highly unlikely the policies will be enough to create the additional supply needed lower housing prices or keep their promises.

Direct Impact to Business Owners and Professionals

There are some major impacts to small business owners and professionals such as doctors. Owning a business adds a lot of additional complexities to your financial situation so I recommend reaching out if you have questions.

Capital Gains: New Rate Starts June 25th 2024

The capital gains inclusion rate will be increased from 50% to 66%, however there will be no $250,000 exemption. The increase will apply to any gains in the corporation. This has some major implications.

Small business owners and professionals such as doctors often use corporations to save for retirement. It can be a good idea, because it also provides some cushion in case the business needs additional funds in the future. If they put money into an RRSP they would not be able to take it back out without significant tax implications.

Although many people think that when a business owner retires, they will sell their business. In reality that is often not the case. Many businesses cannot be sold and the only retirement savings they have is what they have accumulated in their corporations over the years. This increase, increases the tax on their corporate capital gains/retirement savings by over 30%.

The increased capital gains inclusion rate will also lead to an increase in the small business deduction clawback, which was put into place a couple years ago.

One of the foundations of corporate tax is that an individual who is an employee will pay a similar amount of tax as someone who is incorporated. This is called integration. These changes have now disrupted integration. If you are a business owner, we will need to do extra income planning to determine how to best manage how you pay yourself.

***As a result of these changes it may be more beneficial to set up an Individual Pension Plan or use Life Insurance to Invest in a corporation than it was previously. These strategies are more complex and have high fees, Life Insurance is also commonly incorrectly setup for business owners. Please reach out if you want to talk about new retirement savings strategies.

Selling a business:

The sale of a business is a rather complicated endeavour, it often costs upward of $10,000 in professional fees just to ensure you are doing it properly. On top of that, you may remember from my earlier comments that many businesses are not able to be sold.

The measures identified below are a benefit if you can sell the shares of your corporation, however they do not apply if you are unable to sell your shares. For example, if you own a restaurant and you need to sell off your assets/equipment because you cannot find a buyer for your company shares. This leads to inequitable treatment of different types of businesses. Small businesses who need to sell assets instead of shares will be subject to the tax increases, however businesses that can sell shares are getting increased tax credits.

Lifetime Capital Gains Exemption:

Shares of a qualified small business can be sold tax free up to the amount of the lifetime capital gains exemption. The LCGE is increasing to 1.25 million in 2025. There are many strict rules that an owner needs to abide by to claim this tax credit, and it often requires business owners to spend $15,000 or more in professional fees to set up their business to qualify. If you plan on selling a business in the next 5 years, please reach out as soon as possible as some planning needs to be done years in advance of the sale.

When selling a business and claiming the LCGE a business owner will likely pay Alternative Minimum Tax which can be refunded to you over several years.

Generally speaking this is a good proposal, however it only applies to the sale of a qualified small business share. It can be expensive to follow the rules in order to claim the exemption and it does not apply to businesses where a share sale is not possible. This does not seem fair. The tax savings from the Lifetime Capital Gain Exemption has increased substantially, however that is mostly due to the increase in the capital gains inclusion rate.

Canadian Entrepreneurs Incentive

This incentive will reduce the capital gains inclusion rate by half for the sale of small business shares that qualify. The credit will be phased in over 10 years by $200,000 per year. By 2034 the credit will apply to $2,000,000 of gains.

Because this credit will also apply to qualified small business shares,  those who qualify will also likely qualify for the LGCE mentioned above. This credit however, has some unique features and very strict ownership requirements. For example, the share must 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 the business in the financial, insurance, real estate, food and accommodation, arts, recreation, entertainment , consulting or personal care services sectors. This already disqualifies a lot of business owners.

It may become more interesting in later years as the benefit grows in value.

Carbon Tax rebate:

Corporations with less than 499 employees will get some carbon tax rebate. The rebate will be retroactive from 2019 and will be applied automatically if you have filed taxes.

Many of you have correctly pointed out that the government still has not fully approved the 2022 or 2023 budgets and at this rate the budget may not be fully adopted by the next election (and likely not supported if a new party comes into power). While polls would suggest that this is a possibility we cannot make that assumption for tax planning.

If this hypothetical situation were to take place, we would still need to deal with these measures in 2024, making 2024 an oddity for tax planning purposes.

The government now has a track record of implementing bad tax policy and then backtracking at the last minute. We cannot assume that this will happen again so we will need to be prepared for anyone who wants to sell assets before the June 25th deadline.