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Federal Budget Update
The 2024 proposed federal budget has recently been announced, and we wanted to shed some light on a few key elements that have been mentioned so you are aware of how these may affect you, your life and your business.
It’s important to keep in mind these announcements are currently just proposed changes with nothing yet finalized.
Here are a few things to note:
Increased Taxes for Capital Gains
The proposed 2024 budget has partially increased the inclusion rate on capital gains, where individuals having more than $250,000 in capital gains would experience an increase from 50% to 66.66%.
According to the proposed changes, the inclusion rate will remain at 50% for the first $250,000 and increase to 66.66% for any amount exceeding that threshold. The inclusion rate on capital gains earned in corporations and trusts also increases from 50% to 66.66% for all capital gains realized.
However, if individuals are only faced with a capital gains inclusion rate of 50% on the first $250,000 of capital gains, there will likely be a loss of some integration in the tax system. In comparison, corporations are subject to an inclusion rate of 66.66% on every dollar.
The sale of a principal residence will continue to be exempt from capital gains taxation, which is a positive development for homeowners. This exemption remains unchanged in the current budget.
Lifetime Capital Gains Exemption
Proposed changes to the capital gains exemption for Qualified Small Business Corporation (QSBC) Shares, Fishing or Farming Property have been announced.
The lifetime capital gains exemption for these assets will be increased from $1,016,836 to $1,250,000, with the change continuing to be indexed to inflation. These amendments are expected to be effective as of June 25, 2024, once they receive royal assent.
Furthermore, a proposed initiative called the Canadian Entrepreneurs Incentive will change the inclusion rate on the sale of QSBC Shares from 50% to 33.33%.
This change will effectively increase the Capital Gains Exemption to almost $3.25M. The main objective of this initiative is to boost the number of small businesses, which has significantly declined over the past few years.
However, it is essential to note that only a few business owners utilize their Capital Gains Exemption, as most buyers prefer to purchase assets rather than shares. Therefore, it may have little impact on struggling businesses.
Carbon Rebate for Small Businesses
Notably, the federal government has been collecting Carbon Tax from small businesses since 2019, resulting in a significant amount of taxes collected, exceeding $2.5 billion.
However, the recently proposed federal budget introduces the New Canada Carbon Rebate for Small Businesses, which is set to be introduced as a refundable tax credit.
The rebate will be accessible to businesses with 499 or fewer employees. It is anticipated that there will be modifications to the filing of corporate tax returns to enable claiming this rebate.
Unfortunately, this proposal has arrived too late for some businesses that have already ceased operations due to financial challenges. It is essential to remain informed about tax laws and regulations and consult a qualified tax professional to ensure compliance.
Rental Buildings – Accelerated Capital Cost Allowance
The current tax law allows taxpayers to claim a depreciation expense of 4% of a rental property’s acquisition or construction cost.
The recent budget proposal recommends a temporary increase in the depreciation expense to 10% for new rental properties that commenced construction on or after April 16, 2024. This proposal aims to alleviate the tax burden on taxpayers and encourage them to use the tax savings to invest in new rental properties.
However, it is essential to note that the depreciation expense cannot be used to create or enhance a loss. Therefore, taxpayers must have a source of rental income to benefit from this proposal.
Considering the various costs associated with managing a rental property, such as property taxes, interest, insurance, repairs, maintenance, and utilities not covered by tenants, the expected benefits of this proposal may be less significant.
Entrepreneurs’ Incentive
The proposed 2024 budget introduces the Canadian Entrepreneurs’ Incentive (“CEI”), which aims to reduce the tax rate on capital gains on an eligible individuals’ disposition of qualifying shares. Under the CEI, the capital gains inclusion rate would be one-half of the prevailing rate, on up to $2 million in capital gains per individual over their lifetime.
This measure would apply to dispositions that occur on or after January 1, 2025, and the lifetime limit would be phased in by increments of $200,000 per year, starting on January 1, 2025, and reaching a value of $2 million by January 1, 2034.
To qualify, a corporation’s share must have been owned directly by a founding investor for a minimum of five years before disposition. During the five years immediately before the share disposition, the claimant must have been engaged regularly, continuously, and substantially in the business’ activities.
This proposal seeks to incentivize entrepreneurship and support small business corporations in Canada.
We Can Help
When it comes to any further information regarding you, your business and the 2024 federal budget, the team at Mowbrey Gil can answer any questions you might have.
We’d love to hear from you — Contact us today at 780.461.3800.
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