2024 May Update

Spring is always an exciting time in Canadian finance. RRSP deadlines! Tax deadlines! Federal Budget!!!

We hope that you have not been too thrown off by all of this, and that you’ve been able to enjoy your life without worrying too much about getting your taxes filed and understanding how the 2024 Federal Budget will impact your life.

If you’d like a thorough rundown of what the Budget entailed, pretty much every single accounting firm has put out a summary. You can find a few here, here, and here.

That Capital Gains Inclusion Rate

How income tax is applied is confusing to begin with, so if you’re finding this discussion a bit… out there… we don’t blame you. Start here to read a decent explanation from TD about how marginal tax rates work.

When you have “regular” income, these marginal tax rates are applied. Regular income can include your employment income, your net self-employment income, your net rental income, and your interest income.

When you have “dividend” income… well, that’s a long and confusing calculation with a lot of variables. Here’s a summary from TurboTax.

Now, on to capital gains. A capital gain is realized when you sell something for more than you bought it for. A capital loss is realized when you sell something for less than you bought it for.

Your capital gain is not entirely taxed, like your regular income. Only some of it is. As noted in our recent article about family cottages, we didn’t even have a capital gains tax until 1972, and since then the portion of the gain that has been included on Canadian tax returns has been fiddled with quite a bit over the years. It started at 50%, back in 1972, increased to two-thirds in 1988, increased further to 75% in 1990, dropped back down to two-thirds in February 2000 and dropped further to 50% in October 2000.

It appears it’s one of those things our various governments have really liked to play with.

The 2024 Budget proposes that the inclusion rate go back to its pre-2000 two-thirds for capital gains in excess of $250,000 for individuals, and starting at the first dollar for corporations and trusts. The proposal is that this applies to transactions that occur on or after June 25. We understand that Quebec accountants are feeling a bit put out by this, since Jean Baptiste Day is June 24… which means they’ll inevitably be working the holiday.

We use the word “proposes” because, as of the moment we are writing this newsletter, the 2024 Budget has yet to be voted on, which means it’s not yet part of legislation. On top of that, the legislative wording around the capital gains component of the Budget has not yet been released… so we’re not entirely sure what we’re working with here.

There have been some open letters to the Finance Minister to make changes to this proposal. The letters have come from financial professionals across the country, some as part of organizations, and some as small independent groups. The eventual outcome is hard to say and, of course, we’ll be watching it closely. It’ll be the talk of the conferences Julia heads to in both May and June.

Should I stay or should I go?

There seems to be an assumption in the Budget documents that this change will trigger a landslide of transactions prior to the deadline date – which is probably correct.

It may make sense for you to trigger your own transaction, whether that’s an actual sale or some kind of deemed disposition that would trigger the tax payable at the 50% inclusion rate. But in a lot of cases, it may not.

Whether or not this is the right decision for you depends on a lot of things. Here are two key questions to ask yourself:

(1) Were you planning on selling this particular asset in the short term anyway? If so, then it’s time to talk to your tax advisor. If not, then don’t let tax make your investment decisions. The power of compounded deferral is a pretty good thing, even with this change.

(2) If you own this asset personally, rather than corporately or through a trust, is the capital gain arising from a sale going to exceed the $250,000 exclusion? If not, then you wouldn’t really be attracting the higher inclusion rate, at least not right now.

Talking to your tax advisory is so important when looking at this. It’s not the easiest time to get in to talk to them, we know! However, it’s a vital part of this decision. A secondary impact on this type of transaction is the changes to the Alternative Minimum Tax (AMT) that apply to 2024 income. It may be that even if you manage to get the 50% inclusion rate, the AMT calculation will make this less beneficial than we’d hoped.

There’s a lot more to this budget than the capital gains inclusion rate, despite the loud voices talking about it. There’s an increase to the lifetime capital gains exemption, which is wonderful for business owners selling a qualifying business. There’s an increase in how much you can draw from your RRSP through the Home Buyers’ Plan. There’s increased support for eligible disabled people. It’s a lot to look through for those of us working in finance so we do beg your forgiveness for the time we take to assimilate the information. Conference season could not have come at a better time!

Your Spring Planning Team

Practice Notes:

We are incredibly blessed with the best clients ever, who want to come back to chat and get support fairly regularly. The last 12 months have blessed us even more than usual, and our wait list has expanded more than we thought possible. We are now starting to book into 2025! If you are in need of support please contact Ashlee to find out what kind of timeline we might be looking at. We also know lots of wonderful advice-only financial planners across the country, and would be delighted to recommend someone to you if our schedule isn’t working for you.

With tax season in the rearview mirror, conference season begins for those of us in the world of finance! Julia will be co-emcee of the Family Enterprise Canada Symposium in Calgary May 27 – 29, and sticking around an extra day for some meetings. After a quick few days at home, she heads out to Toronto June 2-5 for the annual Society of Trust and Estate Practitioners (STEP) conference, where you know we will be talking about the 2024 Federal Budget for many days.

Spring in the News:

The Globe & Mail published a feature article on Julia and how she came to be an Advice Only Financial Planner. Read all about her story here.

Julia joined Bruce Sellery on Moolala: Money Made Simple for a discussion on Advice Only Financial Planning. You can watch the full podcast here.

For Female Founders host Sarah Bundy and Julia sat down to talk about how to set up your business finances to scale and exit. Check out the segment here.

Please check out our media page here for videos, podcasts, interviews and more.

Planning News Digest:

• Starting your CPP or QPP income: When to start your CPP or QPP income is an important decision. More than a thousand Canadians are making that decision each day. Dr. Bonnie-Jeanne MacDonald, Direct of Financial Research for the National Institute on Aging has done the research on this decision. Read the first release in the series on this important decision here.
• Housing Affordability Measures: The Prime Minister and his cabinet have been under pressure to deal with the housing crisis, which has largely been driven by supply and demand, immigration, rental inflation, high interest rates, labour shortages and more. Check out the housing measures announced to help with affordability in the 2024 federal budget here.
• Capital Gains calculator: Want to fiddle with a calculator that helps you decide whether to realize or defer capital gains? PWL Capital research has provided this calculator for free. Check it out here.

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