The new capital gains inclusion rate and exemptions
The federal government recently increased the capital gains inclusion rate from 50% to 66.67% on gains above $250,000 for individuals and on all gains for corporations. However, other updates have helped offset this change.
For one, the 2024 federal budget proposed to increase the capital gains exemption from $1 million to $1.25 million, which makes an additional $250,000 of capital gains exempt from tax. Secondly, the Canadian Entrepreneurs’ Incentive proposes to reduce the tax rate on capital gains to one‑half of the inclusion rate up to $2 million. Factoring in the increased inclusion rate of 66.67% (or two‑thirds), the capital gains inclusion rate ends up being 33.33% on eligible capital gains up to $2 million, with the first $1.25 million exempt.
This draft legislation is still awaiting parliamentary approval, but it should be carefully considered when tax planning, as the year comes to a close. When these changes are fully rolled out and all the numbers are considered, farms and business owners will be better off than they were before when realizing capital gains up to $6.25 million. This article will elaborate on recent changes in this area and how they affect farm businesses.
Including farm property
In the flurry of recent government updates, some farm businesses may have missed key news related to the Canadian Entrepreneurs’ Incentive. Initially, this program only affected the disposition of qualifying small business shares. However, the federal government recently updated this incentive to also include qualifying farm property.
Annual exemption increases
There are now annual increases of $400,000 of the amount eligible for the exemption until it reaches $2 million in five years. In other words, it will be fully phased in by 2029, rather than over 10 years, as originally proposed in the budget.
Share ownership rule relaxed
Another significant update since these changes were first announced is the elimination of the founder requirement. In the past, this required you to be the original owner of qualifying shares upon issuance. Under the new rules, you are only required to have owned the shares for a minimum of 24 months.
Extending your exemption
If you receive the proceeds on a capital gain over a period of time on a sale of capital property, there is an opportunity to claim a capital gains reserve. This allows you to repeat your exemption on the first $250,000 over multiple years, which makes it easier to steer clear of the new two‑thirds capital gain inclusion rate. If implemented correctly, this strategy will help reduce your overall tax bill.
Ryan Kitchen
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