What are Capital Gains?
A capital gain is the amount of proceeds received from selling a capital asset above its cost basis. Capital assets can include homes, cottages, investments, stocks, or bonds. In Canada, capital gains on the sale of an individual’s primary residence are generally not taxed.
On April 16, 2024, Federal Budget 2024 introduced changes to the capital gain inclusion rate, which determines the portion of the capital gain that is taxable (currently 50 per cent). These changes are scheduled to take effect on June 25, 2024, impacting individuals, corporations and trusts across Canada. As a result, many Canadians will need to engage in financial planning and receive professional advice to adapt to the changes.
What changes have been made?
Capital gain inclusion rate
Federal Budget 2024 proposes to increase the capital gain inclusion rate from 1/2 to 2/3 for capital gains incurred on or after June 25, 2024. For individuals only, capital gains up to $250,000 (gross) will still be eligible for the 50 per cent inclusion rate (on an annual basis). The $250,000 threshold for individuals is fully available in 2024 for capital gains realized on or after June 25, 2024.
The 2/3 capital gain inclusion rate will also apply on qualifying employee stock option benefits that are entitled to the stock option deduction, while the 1/2 inclusion rate will still be available on the first $250,000 of eligible stock option benefits realized (this threshold, however, must be shared with capital gains incurred by the individual).
For tax years overlapping June 25, 2024, separate calculations for capital gains and losses will be needed due to the different inclusion rates.
The Canadian Entrepreneurs Incentive (CEI)
The CEI introduced in Budget 2024 could reduce the tax rate on eligible capital gains realized from selling certain qualifying business shares, with a 1/3 inclusion rate for eligible individuals, reduced from 1/2. The CEI would be available to founding investors disposing of qualifying shares in certain sectors, who own at least ten per cent of the shares in their business, and where their principal employment has been with the company for at least five years. The 1/3 inclusion rate would apply on a lifetime maximum of $2 million of eligible capital gains. The limit will start at $200,000 in 2025 and increase by $200,000 annually, until it reaches $2 million in 2034.
Lifetime Capital Gains Exemption (LCGE)
Individuals who dispose of qualifying small business corporation shares may be able to benefit from the LCGE. Budget 2024 includes an increase to the lifetime capital gains exemption from $1,016,836 to $1,250,000 for 2024. The increased lifetime capital gains exemption of $1,250,000 will be available for eligible dispositions that occur on or after June 25, 2024. The government intends to index the lifetime capital gains exemption to inflation starting in 2026.
Employee Ownership Trust (EOT)
Budget 2024 provides further details regarding the proposed $10 million capital gain exemption on the sale of eligible businesses to an Employee Ownership Trust (EOT), which was previously announced by the government in its 2023 Budget. The $10 million exemption would be available to an individual (other than a trust) on the sale of eligible shares to an EOT where specific conditions are met.
