Canada’s 2024 Federal Budget Update: The Federal Government Stands Firm on Capital Gains Tax

By Katy Pitch, Emma Weiss

In the federal budget released on April 16, 2024 (“Budget 2024”), the government announced that the capital gains inclusion rate will be increased from 50% to 662/3% effective on gains triggered on or after June 25, 2024 (see our earlier post here). Since the release of Budget 2024, tax practitioners have been busy blindly advising on transactions to lock in the lower rate. We say “blindly” because until June 10, 2024, no draft legislation detailing these changes had been released.

The rate increase has been met with strong criticism from diverse stakeholders, including cottage owners, medical professionals, small business owners, and venture capitalists. Many have argued that the new tax increase will stifle Canadian investment and cause a larger group of Canadians than promised by the government to pay more tax. It appears that the government did not find these arguments convincing as the draft legislation concerning the implementation of Budget 2024 released on June 10, 2024, by way of notice of ways and means motion (“Draft Legislation”), describes few changes from what was announced in Budget 2024.

Here are three things everyone needs to know about the Draft Legislation:

1. The $250,000 Relief Available to Individuals Has Not Been Extended to Private Corporations

As described in Budget 2024, individuals are entitled to $250,000 of capital gains in a taxation year at the 50% inclusion rate. The Draft Legislation provides that the $250,000 relief has not been extended to corporations, although it has been to certain trusts, including graduated rate estates and qualified disability trusts. Individuals will now be incentivized to hold investments personally and not through a corporation.

2. Private and Public Stock Options Are Also Subject to a Higher Tax Rate

Traditionally, when an individual exercises stock options, provided certain conditions are met, the individual can avail herself of a deduction (the “Stock Option Deduction”) on the employment benefit (the difference between the fair market value of the shares on the date of exercise minus the exercise price) that is triggered on exercise. The Stock Option Deduction was set at 50% as it was designed to allow holders to be treated in a similar fashion to shareholders. With the capital gains inclusion rate increasing from 50% to 662/3%, Budget 2024 announced a corresponding change to the amount of the Stock Option Deduction, reducing it from 50% to 331/3%. Individuals who have stock option benefits and capital gains in the same year will be able to utilize up to a combined $250,000 annual limit at the 50% inclusion rate.

3. Details of the New Canadian Entrepreneurs’ Incentive Were Not Included

The Draft Legislation does not include any details about the new Canadian Entrepreneurs’ Incentive (“Incentive”). This Incentive is not contemplated to be applicable to sales of certain types of businesses until January 1, 2025. Presumably the details will be included in the bill that will include the Draft Legislation which is expected to be released sometime in the fall.

 

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    Katy Pitch

    Partner

    Katy M. Pitch is a Partner at Mintz whose practice encompasses all areas of Canadian and cross-border corporate income tax law for public and private companies. She serves as a trusted advisor to clients across a wide variety of industries, including financial services, consumer products, life sciences, pharmaceuticals, health care, energy, technology, fintech, and blockchain.

    Emma Weiss

    Associate

    Emma Weiss is an Associate at Mintz who advises clients on complex tax implications associated with transactions in the life sciences and many other industries. Her experience spans the areas of tax law, corporate finance, and securities and corporate law.