Budget 2024 – Focus on Capital Gains

What we have been speculating about for the last five years has come true. The inclusion rate for capital gains has increased significantly. Are we surprised? No. Is Pipeline Planning next? Who knows. In any event, estate planning has just become more important than ever, and we have to get used to paying more tax on passive income including tax at death.

We want to bring to your attention two 2024 budget proposals that could significantly impact your estate and life insurance planning. Many of our clients use life insurance as a funding mechanism to pay capital gains tax liabilities at death. Most use a Joint Last to Die life insurance policy insuring both spouses to increase the cost effectiveness on the insurance, which we recommend where applicable. We continue to advocate for using life insurance for funding capital gains tax liabilities at death because of the special tax preferred treatment of life insurance death benefits to the estate. There is no other financial instrument that offers the rock-solid guarantees and high Internal Rates of Return that life insurance does. Don’t believe it? Ask us to prove it.

For individuals and families that believe in the value of life insurance to pay tax liabilities at death, we advise that a review of your insurance program is due to make sure it meets your expectations. The proposed changes to our tax regime contained in the 2024 federal budget will increase the capital gains liability at death by 33% or 1/3. This means that a tax liability of $1,000,000 will become a tax liability of $1,300,000 on June 25, 2024. We recognize that the exemption on qualifying small business shares has increased as well, but this exemption does not apply to investment holding company shares or other personally held capital assets.  Not to mention that many private company shares are worth much more than the new exemption limits.

There is also a difference between how the inclusion rate is determined between corporations, trust, and individuals. Individuals will benefit from a tiered inclusion rate where the first $250,000 of capital gains each year will have an inclusion rate of 50% with 66% applying to the amount of the capital gain above $250,000. The inclusion rate for corporations and trusts however will start at 66% on the first dollar, the inclusion rate will not be tiered. This is helpful to individuals, but this may not be enough to offset the increased tax liability due to the increased inclusion rate on capital gains above $250,000, especially at death where all capital gains are brought into income, whether realized or not, in the year of death.

Act now to review your estate plan and life insurance program. There is never a better time than now because we don’t know what tomorrow will bring in terms of our health and insurability.

Excerpt from CRA website below:

Lifetime Capital Gains Exemption

The income tax system provides an individual with a lifetime tax exemption for capital gains realized on the disposition of qualified small business corporation shares and qualified farm or fishing property. The amount of the Lifetime Capital Gains Exemption (LCGE) is $1,016,836 in 2024 and is indexed to inflation.

Budget 2024 proposes to increase the LCGE to apply to up to $1.25 million of eligible capital gains. This measure would apply to dispositions that occur on or after June 25, 2024. Indexation of the LCGE would resume in 2026.

Capital Gains Inclusion Rate

Currently, one half of a capital gain is included in computing a taxpayer’s income. This is referred to as the capital gains inclusion rate. The current one-half inclusion rate also applies to capital losses.

Budget 2024 proposes to increase the capital gains inclusion rate from one half to two thirds for corporations and trusts, and from one half to two thirds on the portion of capital gains realized in the year that exceed $250,000 for individuals, for capital gains realized on or after June 25, 2024.

The $250,000 threshold would effectively apply to capital gains realized by an individual, either directly or indirectly via a partnership or trust, net of any:

• current-year capital losses;
• capital losses of other years applied to reduce current-year capital gains; and
• capital gains in respect of which the Lifetime Capital Gains Exemption, the proposed Employee Ownership Trust Exemption or the proposed Canadian Entrepreneurs’ Incentive is claimed.

If you have questions, thoughts, or want to talk more about this topic with one of our advisors, you can book a meeting with us.