Federal budget and other updates
On April 16, 2024, the federal government delivered the 2024 federal budget. The document below highlights key budget proposals from a tax and estate planning perspective, including updates since the initial budget release. This document aims to help you keep track of the changes. While the information provided is not exhaustive, it includes key considerations that may affect your current and future tax planning. Please note that a number of the proposals introduced in the 2024 federal budget have yet to be passed into law; further changes are possible.
Capital gains inclusion rate
After years of speculation about an increase to the capital gains rate, the 2024 budget increased the inclusion rate (the portion on which tax is paid) from one-half to two-thirds for capital gains over $250,000 for individuals, graduated rate estates (GREs) and qualified disability trusts (QDTs), and for all capital gains for corporations and trusts. This became effective June 25, 2024.
What does this mean for me?
Do you have stock options from your employer? These rules could affect those options. The full amount of a stock option benefit is taxed as employment income. The employee may claim a deduction of one-half of the benefit if certain conditions are met. With the new rules, this deduction is reduced to one-third of the benefit if the combined stock option benefit and capital gains for the year exceed $250,000.
If you only hold assets personally, in a GRE or QDT you can proactively manage your capital gains/stock option benefits to keep below the $250,000 threshold. Options include smoothing gains over time, tax loss harvesting and making in-kind charitable donations.
If you hold investments in a corporation or a trust (other than a GRE or QDT), you will be subject to the two-thirds inclusion rate. For corporations, consider moving assets to the personal level, winding up the corporation or making in-kind charitable donations. For trusts, consider distributing capital gains to beneficiaries to avoid the higher inclusion rate. This will need to be evaluated on a year-by-year basis, taking into account the beneficiaries’ individual capital gains in relation to the $250,000 individual threshold.
Trust reporting and bare trust rules
Joint accounts with parents have been a probate tax minimization strategy for many years. These are referred to as bare trusts.1 With proposed changes in the 2018 budget, you could now be required to file a T3 return.
There have been several delays in introducing enhanced trust tax return filing and information reporting requirements.2 There are no bare trust filings required for 2024 taxation years. There are proposed rules for taxation years ending after December 30, 2025, with some exceptions, and with other changes to the scope of trusts that need to file returns.
Small trusts
Trusts with a fair market value (FMV) of $50,000 or less do not need to file a T3 or comply with the additional reporting requirements. There are no restrictions on the assets the trust can hold. The trustee and beneficiary do not need to be related.
Related party trusts
When all the trustees and beneficiaries of a trust are related to each other, the trust holds specific types of assets,3 and the FMV of the property does not exceed $250,000, the trust is exempt from filing a T3 and the additional reporting requirements. This would apply when an adult child is named joint owner of a parent’s bank account, so long as the account has less than $250,000.
Definitions
The proposed changes stipulate that a “deemed trust” includes an arrangement in which one or more persons legally owns a property that is held for the use or benefit of another person, and the legal owner is considered to act as an agent for the person who has use of the property.
There are several exceptions listed to the deemed trust definition that exempt certain arrangements from the trust reporting rules, including
- A situation in which each legal owner is also a deemed beneficiary.
- The legal owners of real property held in a trust are related individuals, and the real property could be designated as the principal residence of one or more of the legal owners for the year (e.g., when an adult child is on the legal title of a parent’s home).
What does this mean for me?
If you have bare trust arrangements that do not meet the exceptions above, you may be required to file a T3 and to provide additional information to the CRA for taxation years ending after December 30, 2025.
Other items of note
Lifetime capital gains exemption (LCGE)
The LCGE is a capital gains exemption on the disposition of certain property (e.g., private company shares, if certain conditions are met). The budget proposed to increase the LCGE to $1,250,000, starting June 25, 2024.
What does this mean for me?
If you are selling a business, farm, or fishing property in the near future, speak with your professional advisors to determine if the LCGE could be used.
Home Buyers’ Plan (HBP)
The HBP is a program that allows you to withdraw funds from your RRSP to buy or build a qualifying home. The 2024 budget increased the Home Buyers’ Plan withdrawal limit from $35,000 to $60,000. This applies to withdrawals made after April 16, 2024.
What does this mean for me?
If you are purchasing your first home and have an RRSP, consider whether the HBP is right for you.
Alternative minimum tax (AMT)
AMT is an additional income tax imposed on individuals and certain trusts that would otherwise be able to reduce their ordinary Canadian federal income tax with certain deductions, exemptions or credits. It usually applies in years when income is received from preferential sources, such as capital gains, stock options and dividends. In order to determine AMT, a notional amount of taxable income is calculated under the AMT rules, excluding the benefit of certain credits, deductions and exemptions. A minimum tax rate is then applied to the adjusted taxable income to determine the AMT amount.
In the 2023 federal budget, there were significant proposed changes to the AMT rules, including increasing the rate of tax used to compute AMT, increasing the basic exemption amount, and expanding the credits, deductions and exemptions that are excluded. The 2024 budget amended some of these rules. The chart below highlights the key changes from both the 2023 and 2024 budget:
| Old rules | Proposed changes | |
|---|---|---|
| AMT rate | 15% | 20.5% |
| Basic exemption amount | $40,000 | $173,000 |
| Capital gains inclusion rate | 80% | 100% |
| Employee stock option benefit inclusion rate | 80% | 100% |
| Capital gains inclusion rate on donations of public securities | 0% | 30% |
| Capital and non-capital loss inclusion rate | 80% | 50% |
| Charitable donation tax credits | 100% | 80% |
| Certain deductions4 | 100% | 50% |
| Certain credits5 | 100% | 50% |
What does this mean for me?
In years with large gains, dividends or stock option benefits, AMT could apply. It is important to be aware of the new rules and to talk to your professional advisors about the potential implications for your income taxes.
In summary
The 2024 federal budget could have significant impacts on your tax situation. The rules are complicated and constantly being updated as they progress from proposal to enacted legislation. Consider the following to determine if the budget will affect your tax situation:
- Did you have large capital gains, personally or in a corporation or trust? If so, the increased capital gains inclusion rate may affect your taxable gains.
- Are you joint on any accounts with your parents and/or other family members? The new trust reporting rules may apply to you.
- Do you have significant income from preferential sources? AMT may apply.
1 A bare trust is a principal-agent relationship in which the trustee has no obligation other than to deal with the trust property as instructed by the beneficiary. The legal title of the trust property is held by the trustee, and the beneficiary has beneficial ownership of the property.
2 Schedule 15 of a T3 return requires trusts to disclose certain information on each trustee, beneficiary, settlor and controlling person.
3 Cash, GICs, mutual funds, personal-use property, exchange-traded securities.
4 Interest to earn property income, certain employment expenses, non-capital loss carryovers.
5 Basic personal amount, medical expense credit, disability credit, tuition credit.
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