3 Burning Financial Questions About the 2024 Federal Budget

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The federal budget continues to attract a lot of criticism, particularly over its decision to increase the capital gains inclusion rate for individuals, trusts and companies from 50 percent to 66.7 percent. The new inclusion rate only applies to individuals above a threshold of $250,000, while corporations and trusts are subject to it for all capital gains.

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“If the Trudeau and Legault governments want to discourage investment, they are on the right track,” said Emmanuelle Faubert, an economist at the Montreal Economic Institute who wrote a study on the increase. “We already have enough trouble attracting investment and a tax increase certainly won’t reverse that trend.”

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But that is the future. What about the here and now, especially since there is more than just an increase in the capital gains inclusion rate? TriDelta Private Wealth financial planner Ted Rechtshaffen answers three pressing questions about actions you may need to consider now.

Q: I have a vacation home that has been in the family for years and provides a large capital gain. We don’t want to sell it, but is there anything I should do now?

A: An action plan you might want to consider would be gifting your property to a family member to crystallize – and pay – the previously lower capital gains tax on unrealized gains.

This is an option, but there are a few things to keep in mind:

• If the property is encumbered with a mortgage or debts, it must be sold at market value and property transfer tax will apply.
• If the property is debt-free and a gift, it can be given to a family member without paying real estate transfer tax. There is always the question of whether the owner wants to give up legal control, and there is also the question of family assets if there are problems with a son-in-law or daughter-in-law in the future.
• Legal fees would probably be under a few thousand dollars, but two attorneys are required, one for the buyer and one for the seller.
• You will still want to conduct an independent valuation of the property to ensure fairness for both parties.

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If you’re older and making large capital gains from your vacation home, it may make sense to change hands in the next two months, effectively freezing the value of the home and paying the lower capital gains tax. Remember, you’ll still need to find the money to pay the big tax bill next spring.

Q: I have an investment holding company with significant unrealized gains. Should I sell the investments now or just keep them?

A: The truth is that it all depends on how long you want to hold your asset and what type of asset it is. There are some who believe that the capital gains rate increase won’t take effect until you earn more than $250,000 in capital gains per year, but that only applies to individuals. For corporations and trusts it starts at one dollar.

Essentially, you’re doing a break-even analysis of whether you now pay a lower capital gains tax and have to cover those taxes yourself, versus whether it would be better to keep the money now but face a higher tax rate when you eventually sell to pay .

If you plan to hold an investment for the long term, especially if you expect a relatively high annual return, you may want to hold onto it. But in most cases, it would be better to sell now if you think you could sell in the next two or three years anyway.

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If you want to look at your personal situation and break-even point, check out this calculator aimed at Canadians with a business or foundation.

Q: I read that we should be more concerned about the Alternative Minimum Tax (AMT) now. Should I be worried?

A: The AMT was introduced in 1986 to better ensure that people cannot use various tax tools and tax shelters to avoid paying taxes. It’s like saying: here’s the rule book, but if you manage to beat the rule book, there’s a new rule to cover it.

Last year’s budget included changes to better target the AMT to high-income earners. They are now being implemented. The most important changes are:

• Increasing the federal AMT rate from 15 percent to 20.5 percent and the basic exemption amount from $40,000 until the start of the second largest federal tax bracket, which is $173,206 in 2024. This is indexed annually.
• Adjusting the calculation of taxable income to expand the limits for certain tax benefits.
• Restricting access to certain tax credits that could otherwise result in a reduction in AMT payable.

The bottom line is that strategies like flow-through stocks will still be beneficial for people in the top tax bracket, but given higher AMT and higher capital gains taxes, the benefits will be less than they have been in many years. This is just one of the common strategies being diluted by the AMT and capital gains tax changes.

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