2024 Federal Budget Presents Time Sensitive Challenges and new Planning Opportunities

The Time Sensitive Challenges

When the 2024 Federal Budget was released on April 16, 2024,there were several notable proposed tax changes which will have direct implications on most Canadians. The first change relates to the capital gains inclusion rate.  Since 2001, the capital gains inclusion rate has been 50%, which means 50% of a capital gain is tax free, and 50% of it is added to your income.  The Federal Budget proposes to increase that to 2/3 (ie: 66.67%). On every $100,000 of capital gains realized, that equates to roughly$8,300 more tax payable, assuming top tax brackets in Saskatchewan.  

All corporations will have to pay this 2/3 rate on all capital gains, regardless of the size of the corporation.  Individuals will have a $250,000 per year exemption, which is helpful for small sales, but would be of no assistance on a year where there is a sale of farmland which was owned for a long time, or where farm operations stop and an auction or other mass sell-off occurs,resulting in large capital gains all concentrated in one year.

The Federal Government budget document postures that these changes will only impact 0.13% of Canadians on personal income taxes, and 12.6%of Canadians on corporate income taxes and suggests that these changes are concentrated among the wealthiest Canadians. Notwithstanding these political catch phrases, the reality is that these rules are much broader than the government suggests and they will impact many people who wouldn’t likely consider themselves to be among the wealthiest Canadians.

As a simple way of determining if these changes will impact you, consider the following:

• If you own land, buildings or equipment in a corporation, these changes will impact you.
• If you own farmland personally, or shares of a corporation, and their value has grown by more than $250,000 since the time you acquired them, these changes will impact you.

The proposed effective date of these changes is June 25,2024, which allows people a short window of time to determine if they should engage in any planning prior to that date.   It is recommended that you touch base with your tax advisor prior to June 25, 2024 to determine what, if anything, you may want to do to put yourself in the best tax position going forward.

To make matters even more prejudicial to taxpayers, in true fashion of the current Federal Government, these rules have been proposed in concept and taxpayers are being forced to act on them, however no actual legislation has been provided as of the date of writing this article.  This is akin to being forced to play a game without any clarification of the rules that apply to it.  It is anticipated that legislation will be tabled some time before June 25, however that is of little use in helping taxpayers plan their affairs now.

There remain significant questions about exactly how this will be implemented, what the final form of it will look like.   Further, given the history of this government on proposing tax rules and then backing off or significantly revising them, the small possibility that the change altogether doesn’t happen.  As such, it would be wise to take a prudent approach at this time with respect to any planning you may undertake prior to June 25, 2024, rather than being scared into pre-paying large sums of tax to the Federal Government as has been forecasted in their budget document.  

The New Opportunities

For quite some time, the lifetime capital gains exemption (“LCGE”)applicable to qualified farming property has been $1,000,000.  The 2024 Federal Budget has proposed that this will be increased to $1,250,000 from June 25, 2024 onwards.  This means that even if you have previously undertaken transactions to utilize your entire LCGE, you will soon have additional LCGE which can be used in any transactions which you may be completing going forward.  Often the LCGE is utilized on transactions where personal land is sold, or assets (land or otherwise) are sold into a farming corporation, either directly or as part of a planned transaction over a number of years utilizing a farming partnership.  Similar to the above capital gains changes, there is not yet any proposed legislation with respect to these changes and therefore the finer details remain to be determined.  

The increase to the LCGE should be added to your list of items to discuss with your tax and estate planning advisor as it may present new opportunities which did not previously exist.

Greg Kirzinger is a tax lawyer and a partner with Stevenson Hood Thornton Beaubier LLP in Saskatoon and practices in the areas of tax,succession planning, farm and business planning and real estate.

Contact: gkirzinger@shtb-law.com

This article is provided for general informational purposes only and does not constitute legal or other professional advice and does not replace independent legal or tax advice.

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