Federal Budget 2024: The Impact of the Changes to the Capital Gains Inclusion Rate

The Liberal government delivered the 2024 Federal Budget this afternoon. To help finance their spending plans, the government introduced, among other things, an increase to the capital gains inclusion rate on realized gains. While there are a number of other important changes proposed to Canada’s tax system in this year’s Budget, the focus of this tax alert will be the sweeping changes to the tax treatment of capital gains. 

For the past 23 years, only one-half of a capital gain has been included in computing a taxpayer’s income. Today’s Budget proposes to increase the capital gains inclusion rate: for corporations and trusts, to two-thirds; and for individuals, two-thirds for the portion of the gain in excess of a $250,000 annual threshold. For individuals, the first $250,000 of realized capital gains in each year will continue to be eligible for the one-half inclusion rate.  The rate increase applies to capital gains realized on or after June 25, 2024. The Budget provides that additional details regarding the implementation of the increase and other corresponding measures will be announced in the coming months.

To illustrate the impact of this change, an individual in Ontario’s top marginal tax bracket with $1,000,000 of unrealized capital gains in excess of the $250,000 threshold noted above will incur close to an additional $90,000 of income taxes upon the realization of the gains. This additional $90,000 of taxes on the realization of the gain represents an additional 9% of taxes on the disposition and a 33% increase in the amount of taxes this individual would have otherwise had to pay prior to today’s Budget.   

The Federal Budget also announced that the lifetime capital gains exemption will be increased to $1.25 million for the dispositions of shares of a qualified small business corporation that occur on or after June 25, 2024. Currently, the lifetime capital gains exemption is $1,016,836 in 2024, and is indexed to inflation. The Federal Budget provides that the indexation would resume in 2026. It seems intentional that individuals who trigger a capital gain in respect of shares that qualify for the lifetime capital gains exemption before June 25, 2024, would not be able to take advantage of the increased exemption. 

Finally, the Federal Budget announced the framework for a new Canadian Entrepreneurs’ Incentive. In general terms, these rules would reduce the tax rate on capital gains realized on qualifying shares by founding shareholders who are actively engaged in an active business, up to a prescribed limit.

The current capital gains inclusion rate of 50% still applies for dispositions occurring before June 25, 2024. As such, there is a small window of opportunity to take advantage of the lower inclusion rate. If you have significant unrealized capital gains, we encourage you to discuss the impact of this measure with one of the members of our Tax and/or Private Client Services Groups.