The new capital gains inclusion rate
There has been speculation in recent years about an increase in the capital gains inclusion rate. Currently, one-half of a capital gain is taxable, a so-called 50% inclusion rate. Budget 2024 finally introduced an increase but only for certain capital gains.
Capital gains realized by corporations and trusts will now be subject to a two-thirds capital gains inclusion rate instead of just one half. Individuals with a capital gain of more than $250,000 will also pay tax at the higher rate. This rate will also apply to stock option income, by reducing the stock option deduction to one-third for employees with option income exceeding $250,000. This inclusion rate change comes into effect on June 25, 2024.
Lifetime capital gains exemption
The lifetime capital gains exemption applies to business owners who sell qualified shares of their small business corporation or sell their qualified farm or fishing property. The exemption allows a tax-free capital gain of up to $1,016,836 for each taxpayer. The budget proposes to increase this limit for sales after June 25, 2024, to $1,250,000. In 2026, the limit would continue to increase with inflation.
Canadian Entrepreneur’s Incentive
The budget also introduces a new Canadian Entrepreneur’s Incentive, effective January 1, 2025, that reduces the capital-gains inclusion rate on certain taxable capital gains by one-half. It applies to founding investors in certain corporations, but excludes professional corporations, a corporation whose principal asset is the reputation or skill of one or more employees, or businesses in the financial, insurance, real estate, food, accommodation, arts, recreation, entertainment, consulting or personal care services sectors. The limit will be $2 million but introduced in $200,000 increments beginning on January 1, 2025, and reaching $2 million by January 1, 2034.
Alternative Minimum Tax
The government has expanded on the Alternative Minimum Tax (AMT) changes from the 2023 budget. In particular, the AMT calculation for taxpayers with large tax deductions and/or tax credits will now allow 80% of the charitable donation tax credit instead of 50%, so as not to discourage philanthropy. (Read: The best charities to donate to for impact in Canada)
Mineral Exploration Tax Credit
The 15% Mineral Exploration Tax Credit for taxpayers who purchase flow through shares has been extended from the March 31, 2024, expiration date to March 31, 2025.
Business income tax measures
Other than the increased capital gains inclusion rate for corporations, the budget did not include changes that would impact most small business owners.
The government provided further clarity on the Clean Energy Investment Tax Credit and Clean Technology Manufacturing Investment Tax Credit to purchase equipment used to generate electricity from solar, wind, water, nuclear fission, or geothermal energy, or produce qualifying materials such as cobalt, copper, graphite, lithium, nickel, and rare earth elements.
Jason Heath, CFP
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