Podcast: 2024 Federal Budget Highlights

In today’s deep-dive episode, John Waters, and your host, Erin Allen, discuss the key takeaways from Ottawa’s recently released 2024 federal budget, breaking down capital gains tax changes, measures affecting registered plans, and other notable proposals — and what it could mean for you. 

Erin Allen is Vice President of Online Distribution at BMO Exchange Traded Funds. She is joined on the podcast by John Waters, who is Vice President and Director of Tax Consulting Services at BMO Private Wealth. The episode was recorded live on Thursday, April 18, 2024.

• Download BMO’s 2024 Federal Budget Review

Episode Summary

2024 Canadian Federal Budget Review

Just a quick reminder that we are not providing tax or investment advice, this is all about providing education and information around the budget. The title of the budget was ​“fairness for every generation” by attempting to restore generational fairness by targeting the wealthy.

Capital Gains Inclusion Rate

Currently under the Canadian tax law 50% of capital gains is included in your taxable income. What is being proposed in this budget is approximately 66% of capital gains will now be included in taxable income, for sales or dispositions on or after June 25, 2024. It will come into affect for corporations and trusts, so holding companies and professional corporations. For individuals, it is going affect wealthier investors because you will need at least $250,000 of capital gains on or after June 25, 2024 to be affected.

Capital Gains vs Dividends

Focusing on the top marginal tax rate. In Ontario, the top rate on eligible dividends is 39% and for capital gains going forward after the change will be slightly under 36%. Currently it is about 27%. What was a gap of 12% is now only about 3%. This slight gap will be there as well for other provinces including BC and Quebec.

Real Estate

There was a reference to about 40,000 individuals that would have to be concerned about this measure. If you are selling a rental property, the gain can be in excess of $250,000, or when accumulated with other gains. The principal residence exemption still exists and it is not impacted by these changes. 

Stock Options

There is the ability to get a 50% deduction to reduce your net income, similar to capital gains. The changes that are being proposed will also affect that taxable benefit for stock options. So instead of the 50% net inclusion, we will have a 66% net inclusion. So the deduction for the stock option benefit will be reduced. The $250,000 threshold would also have to be shared in a given year. For an individual who has capital gains and stock options, it would be the total of those in excess of the $250,000 that would be potentially subject to this higher capital gains inclusionary rule.

ETF and Mutual Funds

Any capital gains that are realized are potentially subject to the change in the inclusion rate over that $250,000 threshold. To be clear, if someone has $251,000 of capital gains in a given year, it’s only that incremental $1,000 that would be subject to the higher inclusion rate. Everything at $250,000 and below would still be subject to the same 50% inclusion rate.

Life Capital Gains Exemption

The flip side to the increase in the capital gains inclusion rate is that there was also an increase in the capital gains exemption, from approximately $1 million to $1.25 million. This exemption applies only to limited sets of property and shares of a private business.

Alternative Minimum Tax

The alternative minimum tax is it’s been around since 1986. There were some important changes in last years budget. It focuses on wealthier Canadians with significant levels of income that can claim significant deductions, expenses, credits. They have to pay at least a minimum amount of tax, notwithstanding that their regular taxable income might be low, or their regular tax might be low. What was previously 15%, you will now have to apply a minimum federal tax rate of 20.5%.

Registered Plans

The main changes to registered plans were around the Home Buyers’ Plan. This gives a first-time home buyer the ability to withdraw what was previously $35,000 tax free from their RRSP, and then having to repay over a 15-year period. That limit was increased to $60,000. And the timeframe of when you have to start repaying is delayed until the 5^th year. 

Business Owners and Entrepreneurs 

Business owners can access, in addition to the capital gains exemption on qualifying businesses, a potentially lower capital gains rate on the sale of their business that they are actively involved in. It is bit more restrictive, excluding certain industries. As well if you sell your business to an employee ownership trust (employees buy you out), there is the ability to get up to a $10 million exemption of the sale of the shares.