Capital Gains Inclusion Rates and more from the 2024 Federal Budget with a Tax Principal

Mark Woynillowicz, CPA, CA  joins us to chat about and simplify the bigger changes coming out of the 2024 Federal Budget. He explains how the change in the capital gains inclusion rate may affect you, and what else you might want to know about the Budget.

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Transcript

00;00;07;24 - 00;00;21;07
Speaker 1
Hello and welcome to Integrating for Success. a Ward & Uptigrove podcast. My name is Amy Noonan and I will be your host. We're joined today by Mark Woynillowicz, principal here in the tax department. Thanks for joining, Mark.

00;00;21;29 - 00;00;22;23
Speaker 2
Happy to be here.

00;00;23;16 - 00;00;49;02
Speaker 1
So as a lot of our listeners know, we have a specialized tax department here it up to grove tax laws and legislation are constantly changing. And let's be honest, no one wants to be paying more tax than they have to. So that's what our tax department is there to do. Continuously interpret the legislation and make sure you're complying with the law, of course, while ensuring you're not paying more than is necessary.

00;00;49;02 - 00;00;50;23
Speaker 1
Is. Is that fair to say? Mark.

00;00;51;11 - 00;00;53;03
Speaker 2
That's a wonderful way of putting it.

00;00;53;17 - 00;01;19;19
Speaker 1
Perfect. So most recently, the big news in the world of tax is the release of the 2024 federal budget. I think everyone would agree that the biggest piece was the change to the capital gains inclusion rate, which I mean, it's been making headlines across the country. So maybe you could start by touching on how the change to the capital gains inclusion rate will affect work after growth clients.

00;01;20;27 - 00;01;48;12
Speaker 2
Yeah, absolutely, Amy. So the main thing that's coming out of the budget, as you mentioned, is the change to the capital gains inclusion rate. So it's going to have a very profound effect on a number of our clients. Now, I will caveat that with saying that when they released the budget, they did release accompanying draft legislation. Okay. So what comes into the details may not always be exactly what comes out on budget day.

00;01;48;13 - 00;02;14;02
Speaker 2
So that's where the devil's in the details. And we need to make sure as a firm we pay attention to those minute details that will come out once the legislation is there. But in a nutshell, if it comes out as it is anticipated to do so, what we're going to end up seeing is that individuals who have capital gains below 250,000 bucks, there will be no change to them.

00;02;14;02 - 00;02;41;09
Speaker 2
They'll still have a 50% inclusion rate. However, for capital gains over and above 250,000 for individuals that inclusion rate's going to go from 50% to two thirds. So it's quite a significant jump. And then for corporations and trusts, they will have the increase of their inclusion rate to two thirds. And there's no sort of safe harbor that there is there for individuals.

00;02;41;09 - 00;02;44;02
Speaker 2
So it will have a profound effect on many of our clients.

00;02;44;17 - 00;02;54;00
Speaker 1
So so clarifying for me, does this mean that the government is asking us to take two thirds of capital gains so close? Okay.

00;02;55;02 - 00;03;25;14
Speaker 2
So so to kind of walk you through how the math works on this is that the inclusion rate is really a percentage of how much of a capital gain goes on your pat on your tax return. Let it be either personal or a corporate tax return or trust tax return, for that matter. So to walk you through a numerical exercise, if I had a $200 capital gain, capital gains in Canada defined as your difference between what your proceeds of disposition are and what your adjusted cost basis.

00;03;25;14 - 00;03;55;01
Speaker 2
So let's walk through a numerical example where I sell a capital property for $200 and I have a cost basis zero. So my capital gains 200 bucks if I have a $200 capital gain that I incur prior to June 20, 2024, I have $100 that goes in my pocket. The government's never going to touch that. Right? And then I have $100 that goes on my tax return, and then it be my personal tax return for my corporate tax return.

00;03;55;13 - 00;04;34;06
Speaker 2
And then that 100 bucks on the tax return is then subject to whatever marginal tax bracket I found for an individual or whatever my corporate tax rate is in question on that time. Now, going forward, if I dispose of a capital property after June 25th, let's say it's July 1st, for example, what happens then is that same 200 bucks that I had in the proceeds of disposition don't change, but now I've got $200, 134 is going to go on my tax return and I'm only going to put $66 in my pocket tax free.

00;04;34;17 - 00;04;48;05
Speaker 2
So the government is getting a larger piece of the pie to put it that way, but it doesn't necessarily mean they're taking the whole amount from an inclusionary. It's just a reference to how much of that capital gain goes on your tax return. Gotcha.

00;04;48;24 - 00;05;12;07
Speaker 1
So, yeah, I mean, you're using the example of $200, but you know, you look at it like $20,000, 200,000 or more. And, you know, we're talking some some pretty big numbers. Then I guess we you know, we've been talking to a lot of accountants in their department specifically recently about estate planning, transferring firearms and whatnot. So I feel like this could be really relevant to them and many other clients here.

00;05;12;07 - 00;05;20;23
Speaker 1
So, you know, what kind of advice would you give your clients if they have a large unrealized capital gain on on either land or shares?

00;05;22;03 - 00;05;45;08
Speaker 2
There's no doubt that our farm group is one of the, I would say, primary culprits when it comes to this year, because there's so much good value in land, especially in southwest Ontario today, that if you were to trigger a gain before June 25th versus after June 25th, the difference in tax can be in can really add up.

00;05;45;22 - 00;06;06;14
Speaker 2
Yeah, really, really quick. Mm hmm. So the number one advice that we're telling our clients, and it's easier said than done. And don't panic. Don't. Don't panic. That's number one. Sure. Each client scenario is different. Each one has its own set of facts. What does what do you hope to accomplish with this capital properly? Do want to hold it long term?

00;06;06;25 - 00;06;28;09
Speaker 2
Do you want to transfer down the road in a succession plan? As you've mentioned, that's really what we're coming after there. We need to know what those facts are. Sometimes when it comes to tax planning, we don't always have those facts outlined in a row and sometimes they change down the road as well. But at least having a starting point that we can go from for tax planning is what we got to go at this point here.

00;06;28;09 - 00;06;47;26
Speaker 2
But number one is don't panic. Let's figure out what the details are in today's environment. The last thing you want to do is trigger a big capital gain. And then come April 30th or or six months after your year end and you say, jeez, I got a whole bunch of tax to pay, did I really accomplish what I wanted to accomplish?

00;06;48;09 - 00;06;50;05
Speaker 2
We really need to be careful on that.

00;06;50;11 - 00;07;11;13
Speaker 1
Yeah. Yeah, I think that's great advice. You know, not panicking is especially when it comes to succession planning. You know, the the thing that we keep repeating, especially with our most recent series on estate planning for farmers, you know that the timelines are so long to transfer the farms to, you know, making rash decisions. Probably not not great overall.

00;07;11;13 - 00;07;22;12
Speaker 1
So anyways, so great capital gains inclusion rate, huge news. Were there any other changes announced in the budget that our clients or listeners should be aware of?

00;07;23;19 - 00;07;47;10
Speaker 2
What the the 2024 budget introduced a whole bunch of measures. It was quite a significant budget this year. But I really want to focus on two other changes that are going to affect what I would say the bulk of our clients. Number one is called the Canadian Entrepreneurs Incentive. So we've talked here so far today about how the inclusion rate is going to 66 and two thirds percent.

00;07;47;20 - 00;07;47;27
Speaker 1
Mhm.

00;07;48;21 - 00;08;00;16
Speaker 2
The Canadian entrepreneurs incentive is going to take that rate and cut off by half if you have what's called an eligible disposition. Now as to what is an eligible disposition, I don't know yet.

00;08;00;20 - 00;08;01;09
Speaker 1
Okay.

00;08;01;14 - 00;08;21;11
Speaker 2
It's going to depend again how legislation goes to the House of Commons and everything. But overall, what they're going to say is that if you have a company that you started off and you founded it from the beginning and you've been running it for five years or so, again, devil's in the details and spitballing from what's here in the budget, right?

00;08;21;13 - 00;08;40;20
Speaker 2
But if we have an eligible disposition, what happens is the government's going to take that 66 and two thirds inclusion rate and they're going to cut it in half and we're going to have 33 and a third percent inclusion rate. So more money goes into your pocket tax free if you're able to take advantage of this entrepreneur's incentive.

00;08;41;01 - 00;09;05;06
Speaker 2
Now, the incentive is capped at about $2 million and it's going to be phased in over ten years. So it's about 200,000 bucks a year that is going to come in. But that's definitely a big welcome change in the tax community to see something like that. The other big change is the increase to the capital gains exemption, which you access by selling qualifying small business shares or qualifying farmer fishing property.

00;09;06;13 - 00;09;32;20
Speaker 2
As of today, being prior to June 25th, 2024, that exemptions and $1,017,000. I'm rounding here but it's about 1,017,000 after June 25th, it's going up to $1.25 million. So it's quite a significant jump there. We may actually see some clients who, even though they're going to be subject to a higher inclusion rate after June 25th, they may actually come out ahead because the inclusion rate has gone up as well.

00;09;32;28 - 00;09;43;06
Speaker 2
So definitely it goes back to that example that every client is different, every client is unique. We really have to weigh our facts and assumptions. Importantly, at this point in the game before the legislation drops.

00;09;43;22 - 00;10;06;12
Speaker 1
Yeah. Oh, that's so interesting. Especially the you know, we've been talking a lot about capital gains exemption on this podcast and that's really interesting, you know, just how much it's jumped in. And again, going back to the don't panic just because this new piece of information is coming out, it may not be, you know, so, so bad for you after all, or or however you want to look at it.

00;10;06;12 - 00;10;29;01
Speaker 1
So that's really interesting to note because, you know, there's a lot of information when you see the budget come out. And I think it can be a little overwhelming and it's hard to sort of disseminate what's important and what actually what what it means to you personally. So so yeah, I really appreciate you coming on here and taking the time to to go through, you know, what, our clients actually need to know what it could mean for them.

00;10;29;01 - 00;10;36;11
Speaker 1
And probably most importantly, don't panic. So, yeah, I hope to have you on again. Mark, thank you so, so much.

00;10;37;00 - 00;10;46;00
Speaker 2
Thank you for having me. Any.