Federal Budget Measures for Individuals

The 2024 federal budget tabled by Finance Minister Chrystia Freeland on April 16 contained several proposals that will impact the financial, tax and estate plans of Canadians. 

 

Federal income tax rates

There are no changes to personal federal income tax rates or income brackets.

 

Capital gains inclusion rate

Currently, the capital gains inclusion is 50%, where one-half of any capital gain is taxable, while the remaining 50% is tax free. Budget 2024 proposes to increase the capital gains inclusion rate from one-half to two-thirds for corporations and trusts. The same increase would apply to 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, net of any current year capital losses, net capital losses from prior years (adjusted to reflect the value of the inclusion rate for the capital gains being offset), as well as capital gains in respect of which the Lifetime Capital Gains Exemption, proposed Employee Ownership Trust Exemption or the proposed Canadian Entrepreneurs’ Incentive is claimed.

The employee stock option deduction would be limited to one-third of the taxable benefit, reflecting the new capital gains inclusion rate. However, a deduction of one-half the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains would be available.

For tax years that begin before and end on or after June 25, 2024, two different inclusion rates would apply. Transitional rules will require taxpayers to separately identify capital gains and losses realized before June 25, 2024 (Period 1) and those realized on or after June 25, 2024 (Period 2) so that the appropriate inclusion rate can apply to the transaction. Also, the annual $250,000 threshold for individuals would be fully available in 2024 and will not be prorated.

Planning point: it is important to note that selling a principal residence will continue to be exempt from capital gains taxes. Also, in situations where the higher capital gains inclusion rate may apply, there may be tax planning opportunities available to spread the capital gain over multiple years to stay within the $250,000 annual threshold.

 

Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) is a parallel tax calculation that allows fewer tax credits, deductions and exemptions than under the ordinary personal income tax rules. Taxpayers pay either regular tax or AMT, whichever is highest. Last year’s budget (2023) revamped AMT by proposing increases to the tax rate and broadening the scope of AMT.

 

Budget 2024 proposes to make further changes to the AMT proposals. Some of those proposals include:

• Increasing the claim for the charitable donation tax credit to 80% (from the previously proposed 50%).
• Fully allowing deductions for the Guaranteed Income Supplement, social assistance, and workers’ compensation payments;.
• Fully exempting Employee Ownership Trusts from the AMT.
• Allowing certain disallowed credits under the AMT to be eligible for the AMT carry-forward (i.e., the federal political contribution tax credit, investment tax credits and labour-sponsored funds tax credit).
• AMT exemption for certain trusts for the benefit of Indigenous Groups.

Planning point: The changes to AMT with respect to charitable donation tax credits is a positive change for Canadians planning large donations to charity. It is important to note that no additional amendments are made to the previously announced change to in-kind donations to charity, where for AMT purposes, the inclusion rate is still proposed to be 30%.

 

Home Buyers’ Plan

Home Buyers’ Plan (HBP) is a program for first-time home buyers in Canada. It allows first time home buyers to borrow funds from their RRSP and use those funds to buy or build a first home, for either themself or for a family member with a disability. The withdrawn funds will need to be paid back into the RRSP over a 15-year period. In 2019, the withdrawal limit was increased to $35,000 per individual.

The 2024 Federal Budget proposes to increase the Home Buyers’ Plan limit from $35,000 to $60,000, starting for withdrawals made after Budget Day. In addition, to further help recent and upcoming first-time home buyers, Budget 2024 proposes to allow Canadians who withdrew from their Home Buyers’ Plan between January 1, 2022, and December 31, 2025, to have their repayment grace period extended by three years.

Planning point: With the new FHSA already helping many Canadians, and now the increased HBP limits, Canadians will have more opportunity to access funds for the purchase of their first home. Also, the temporary relief measures give first-time home buyers up to five years before they need to start repayments, so they can focus on their mortgage payments and getting ahead.

 

Employee Ownership Trusts (EOTs)

Budget 2023 proposed tax rules to facilitate the creation of employee ownership trusts (EOTs). The 2023 Fall Economic Statement proposed to exempt the first $10 million in capital gains realized on the sale of a business to an EOT from taxation, subject to certain conditions.

 

Budget 2024 provides further details on the proposed exemption and conditions for individuals claiming the $10 million dollar exemption, including residency requirements for beneficiaries of the EOT, meeting a 50% test for assets used in the active business, and other criteria. If multiple individuals disposed of shares to an EOT and meet the conditions, they may each claim the exemption, but the total exemption cannot exceed $10 million. The individuals would need to agree on how to allocate the exemption.

It is important to note that there may be events within 36 months after the sale to the EOT which may disqualify the taxpayer from claiming the exemption. For example, if the EOT loses its status as an EOT, or if more than 50% of the assets are no longer used in the active business. For AMT purposes, capital gains exempted through this measure would be subject to an inclusion rate of 30%, similar to the treatment for gains eligible for the lifetime capital gains exemption.

This measure would apply to qualifying dispositions of shares that occur between January 1, 2024, and December 31, 2026.

 

Canada Child Benefit

The Canada Child Benefit (CCB) is an income-tested benefit that is paid monthly and provides support for eligible families with children under the age of 18. A CCB recipient becomes ineligible for the CCB in respect of a child the month following the child’s death.

Budget 2024 proposes to amend the Income Tax Act to extend eligibility for the CCB in respect of a child from one month to six months after the child’s death. For example, if a child dies in July, the child’s primary caregiver would be eligible to receive the CCB in respect of this child for August through January under the proposed change.

This measure would be effective for deaths that occur after 2024.

 

Volunteer firefighters and search and rescue

The Volunteer Firefighters Tax Credit and the Search and Rescue Volunteers Tax Credit allow individuals who performed at least 200 hours of combined volunteer service during the year as a volunteer firefighter or a search and rescue volunteer to claim a 15% non-refundable tax credit based on an amount of $3,000.

Budget 2024 proposes to increase the credit from $3,000 to $6,000, resulting in a tax credit of $900, for 2024 and later years.

 

Mineral Exploration Tax Credit

The Mineral Exploration Tax Credit (METC) provides an income tax benefit for individuals who invest in mining flow-through shares, which augments the tax benefits associated with the amounts that are flowed through. The METC, equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors, will be extended to flow-through share agreements entered into, on or before March 31, 2025. The credit was scheduled to expire on March 31, 2024.

 

Disability Supports Deduction

The Disability Supports Deduction allows individuals who have an impairment in physical or mental functions to deduct certain expenses that enable them to earn business or employment income or to attend school.

Budget 2024 proposes, starting in 2024 to expand the list of expenses recognized under the Disability Supports Deduction, specifically for individuals with severe and prolonged impairment in physical functions, impairments in physical or mental functions and vision impairments. It also proposes that expenses for service animals be deductible as well. However, taxpayers will be able to choose whether the expense would be claimed as a medical expense tax credit, or as a Disability Supports Deduction.

 

Qualified investments for registered plans

Registered plans of all types (RRSPs, RRIFs, RESPs, RDSPs, TFSAs, FHSA) can invest only in qualified investments for those plans. A broad range of assets are qualified investments, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates. Over time as more registered plans became available and the list of qualified investments expanded, inconsistencies between plans and difficulty in understanding the rules have occurred.

Budget 2024 invites stakeholders to provide suggestions on how the qualified investment rules could be modernized and improved. Specific issues under consideration include:

• Investments in small businesses and how can the rules apply consistently to all registered savings plans.
• Whether annuities that are qualified investments only for RRSPs, RRIFs and RDSPs should continue to be qualified investments.
• Whether the conditions that certain pooled investment products must meet to be a qualified investment are appropriate, including the ongoing value of maintaining a formal registration process for registered investments.
• Whether and how qualified investment rules could promote an increase in Canadian-based investments.
• Whether crypto-backed assets are appropriate as qualified investments for registered savings plans.

Stakeholders are invited to submit comments by July 15, 2024.

 

 

Article written by the Mackenzie Tax and Estate Team