Show Transcript
In its latest federal budget, Ottawa proposed changes to the capital gains tax rules for wealthy individuals and corporations. Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Greg Bonnell to discuss how this budget could impact your finances.
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* One of the big news items in the federal budget are those proposed new rules when it comes to capital gains taxes for wealthy individuals and corporations. Nicole Ewing, Director of Tax and Estate Planning at TD Wealth, joins us now to dig into this and some of those other proposed measures. Nicole, always great to have you with us.
* Great to be here, Greg.
* Alright, so let's start with those changes to capital gains taxes for wealthy Canadians, corporations. What do we make of it?
* Well, it happened. It finally happened. We saw a change in the capital gains rate. Now this one, it will-- as we know, so current capital gains inclusion rate is 50%. So you need to include 50% of the capital gain in your taxes, and you are subject to tax on that amount.
- What's changing is for trusts and corporations. That rate will change to 2/3. So you will need to include 2/3 of the capital gain and be taxed on that amount. For individuals, that 2/3 rate will only kick in once you are above the $250,000 threshold. So under $250,000, you are still subject to the 50% inclusion rate. Above that, you will be subject to these new rules as of June 25, 2024. Those new rules will apply. So that over $250,000, we have a 2/3 inclusion rate for individuals.
* Let's talk about June 25 of this year when those new proposed rules would kick in. Does that complicate things when it comes to filing 2024 taxes for the 2024 tax year?
* Well, there will be some transitional rules. What we know is that there won't be a prorated amount for 2024, so that $250,000 will apply. It will make it perhaps a little bit complicated for individuals when it comes to their taxes, but this is why we seek the advice of experts on this.
- The details of the transitional rules will have to be dug into a little bit over the coming days. But with any change, any time there's a change, it's going to require some adjustments to our thinking and our planning and the way that we approach our taxes.
* I think you raise an important point there. As people take a look at this and if it does apply to them, time to talk to probably a professional about, what does it actually mean for me? What does it mean for my strategies?
* Well, and interestingly, Greg, what we know is that the-- according to the release, it is 0.13% of Canadians who are going to be subject to this, and they would have an average income of $1.42 million. So those are the ones who are expected to be caught by this.
- And then 12% of corporations and trusts are expected to face that higher inclusion rate. So this is not going to apply to very many individuals. But certainly for those to whom it does apply, they would want to get that expert advice, perhaps not only on how to file the taxes but maybe some planning going forward about the types of income sources that they would want to be receiving and whether there's any changes to the structure of their cash flow or income that they might want to be thinking about.
* Alright, so that's capital gains tax rules, which, as you said, every year, we went into this budget with this idea that there could be a change. There wasn't. Now we've had it delivered. A great breakdown of what's happening there. You and I have talked a lot about the Alternative Minimum Tax. Some different focus here, I guess, when it comes to charitable donations. What's going on?
* Yeah, so it looks as though the government has responded to some of the feedback that when these rules were announced, there was some pushback on them because essentially, we were going from a 40%-- or pardon me, $40,000 would be subject to AMT to $173,000. So very, very-- increase the amount significantly as to what sort of income would be subject to this Alternative Minimum Tax.
- What ended up being caught there, though, was charitable donations. And it was caught in a way that there was some concern, frankly, that it would impede or prevent maybe some people from making the charitable donations that they otherwise would have wanted to be making because the Alternative Minimum Tax would be a factor that would be considered.
- And so what these rules do then is change-- the proposed rules change the amount of the tax treatment for charitable donations so that individuals can claim 80% as opposed to the previously proposed 50%. We would also be able to fully deduct guaranteed income supplements, social assistance, workers' compensation amounts, fully exempt Employee Ownership Trusts from the AMT regime, and allow certain of the disallowed credits of the regime. This is where you're not essentially going to be able to get credit for the credits. And those have been expanded as well so that it appears as though the government has made some adjustments to this regime.
- It is still going forward with the changes to the Alternative Minimum Tax. But for charitable donations, they have been heard, and we have an 80% as opposed to a 50% credit for that.
* Some interesting things there. Let's talk about some measures for business owners. The Lifetime Capital Gains Exemption when you sell a small business. What's happening here?
* So we have the Lifetime Capital Gains Exemption that you essentially are able to not pay tax on a portion of the amount that you sell. That has been-- it was essentially indexed up to $1 million for many years. It is increasing to $1.25 million. So the Lifetime Capital Gains Exemption is increasing to $1.25 million, which will essentially give folks an additional amount to be able to not pay tax on.
- Now, of course, that only applies to certain types of shares of certain types of corporations. There's a number of rules. There's rules about how long the shares need to have been held for, the type of business it is, the sorts of assets that it holds, whether or not it has significant passive income or retained earnings.
- So again, this is where we do want to have tax professionals helping us ensure that if you are going to be claiming that Lifetime Capital Gains Exemption, you are going to meet the qualifications. But for those who do, we're seeing an increase in that amount. It's going to $1.25 million. It will resume that indexing. It was sort of indexing for a number of years. It will resume that indexing in 2026.
* OK, let's stick on business owners here. Also, something called the Canadian Entrepreneurs' Incentive. Tell me about that.
* Well, this is really interesting because in addition to the Lifetime Capital Gains Exemption, this new incentive is specifically designed for entrepreneurs, and it reduces the tax rate on capital gains on the disposition of these qualifying shares. It reduces it by half of the capital gains inclusion rate that would otherwise apply. So depending here, we have either that 50% inclusion rate or the 66% inclusion rate.
- But that is now going to allow for some additional reductions of the capital gains amounts that an entrepreneur would need to pay. Now, the limit is going to go up to $2 million. It will be phased in increments of $200,000 beginning in 2025.
- And there's a number of conditions. With all of these sorts of things, there are a number of conditions that need to be met. But what's interesting about this one to me was that there's a requirement that the claimant, so the individual who is making the claim, must be a founding investor at the time that the corporation was initially capitalized, which really does distinguish this as a feature for entrepreneurs as opposed to maybe those who acquire shares in a private corporation but were not necessarily there from the ground up. So an interesting development.
* Nicole, always great to get your insights. Thanks so much for joining us.
* Oh, my pleasure.
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* Great to be here, Greg.
* Alright, so let's start with those changes to capital gains taxes for wealthy Canadians, corporations. What do we make of it?
* Well, it happened. It finally happened. We saw a change in the capital gains rate. Now this one, it will-- as we know, so current capital gains inclusion rate is 50%. So you need to include 50% of the capital gain in your taxes, and you are subject to tax on that amount.
- What's changing is for trusts and corporations. That rate will change to 2/3. So you will need to include 2/3 of the capital gain and be taxed on that amount. For individuals, that 2/3 rate will only kick in once you are above the $250,000 threshold. So under $250,000, you are still subject to the 50% inclusion rate. Above that, you will be subject to these new rules as of June 25, 2024. Those new rules will apply. So that over $250,000, we have a 2/3 inclusion rate for individuals.
* Let's talk about June 25 of this year when those new proposed rules would kick in. Does that complicate things when it comes to filing 2024 taxes for the 2024 tax year?
* Well, there will be some transitional rules. What we know is that there won't be a prorated amount for 2024, so that $250,000 will apply. It will make it perhaps a little bit complicated for individuals when it comes to their taxes, but this is why we seek the advice of experts on this.
- The details of the transitional rules will have to be dug into a little bit over the coming days. But with any change, any time there's a change, it's going to require some adjustments to our thinking and our planning and the way that we approach our taxes.
* I think you raise an important point there. As people take a look at this and if it does apply to them, time to talk to probably a professional about, what does it actually mean for me? What does it mean for my strategies?
* Well, and interestingly, Greg, what we know is that the-- according to the release, it is 0.13% of Canadians who are going to be subject to this, and they would have an average income of $1.42 million. So those are the ones who are expected to be caught by this.
- And then 12% of corporations and trusts are expected to face that higher inclusion rate. So this is not going to apply to very many individuals. But certainly for those to whom it does apply, they would want to get that expert advice, perhaps not only on how to file the taxes but maybe some planning going forward about the types of income sources that they would want to be receiving and whether there's any changes to the structure of their cash flow or income that they might want to be thinking about.
* Alright, so that's capital gains tax rules, which, as you said, every year, we went into this budget with this idea that there could be a change. There wasn't. Now we've had it delivered. A great breakdown of what's happening there. You and I have talked a lot about the Alternative Minimum Tax. Some different focus here, I guess, when it comes to charitable donations. What's going on?
* Yeah, so it looks as though the government has responded to some of the feedback that when these rules were announced, there was some pushback on them because essentially, we were going from a 40%-- or pardon me, $40,000 would be subject to AMT to $173,000. So very, very-- increase the amount significantly as to what sort of income would be subject to this Alternative Minimum Tax.
- What ended up being caught there, though, was charitable donations. And it was caught in a way that there was some concern, frankly, that it would impede or prevent maybe some people from making the charitable donations that they otherwise would have wanted to be making because the Alternative Minimum Tax would be a factor that would be considered.
- And so what these rules do then is change-- the proposed rules change the amount of the tax treatment for charitable donations so that individuals can claim 80% as opposed to the previously proposed 50%. We would also be able to fully deduct guaranteed income supplements, social assistance, workers' compensation amounts, fully exempt Employee Ownership Trusts from the AMT regime, and allow certain of the disallowed credits of the regime. This is where you're not essentially going to be able to get credit for the credits. And those have been expanded as well so that it appears as though the government has made some adjustments to this regime.
- It is still going forward with the changes to the Alternative Minimum Tax. But for charitable donations, they have been heard, and we have an 80% as opposed to a 50% credit for that.
* Some interesting things there. Let's talk about some measures for business owners. The Lifetime Capital Gains Exemption when you sell a small business. What's happening here?
* So we have the Lifetime Capital Gains Exemption that you essentially are able to not pay tax on a portion of the amount that you sell. That has been-- it was essentially indexed up to $1 million for many years. It is increasing to $1.25 million. So the Lifetime Capital Gains Exemption is increasing to $1.25 million, which will essentially give folks an additional amount to be able to not pay tax on.
- Now, of course, that only applies to certain types of shares of certain types of corporations. There's a number of rules. There's rules about how long the shares need to have been held for, the type of business it is, the sorts of assets that it holds, whether or not it has significant passive income or retained earnings.
- So again, this is where we do want to have tax professionals helping us ensure that if you are going to be claiming that Lifetime Capital Gains Exemption, you are going to meet the qualifications. But for those who do, we're seeing an increase in that amount. It's going to $1.25 million. It will resume that indexing. It was sort of indexing for a number of years. It will resume that indexing in 2026.
* OK, let's stick on business owners here. Also, something called the Canadian Entrepreneurs' Incentive. Tell me about that.
* Well, this is really interesting because in addition to the Lifetime Capital Gains Exemption, this new incentive is specifically designed for entrepreneurs, and it reduces the tax rate on capital gains on the disposition of these qualifying shares. It reduces it by half of the capital gains inclusion rate that would otherwise apply. So depending here, we have either that 50% inclusion rate or the 66% inclusion rate.
- But that is now going to allow for some additional reductions of the capital gains amounts that an entrepreneur would need to pay. Now, the limit is going to go up to $2 million. It will be phased in increments of $200,000 beginning in 2025.
- And there's a number of conditions. With all of these sorts of things, there are a number of conditions that need to be met. But what's interesting about this one to me was that there's a requirement that the claimant, so the individual who is making the claim, must be a founding investor at the time that the corporation was initially capitalized, which really does distinguish this as a feature for entrepreneurs as opposed to maybe those who acquire shares in a private corporation but were not necessarily there from the ground up. So an interesting development.
* Nicole, always great to get your insights. Thanks so much for joining us.
* Oh, my pleasure.
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