Federal budget 2024-2025

• Sale of a principal residence, which still benefits from an exemption.
• Sale of shares eligible for the capital gains exemption (exempted portion only).
• Disposition of investments in registered accounts (RRSP, RRIF, LIRA, LIF, TFSA, FHSA, RESP).
• For individuals, the first $250,000 of capital gains realized per calendar year.

• Real estate sales: secondary residences or rental properties.
• Investments generating capital gains held in personal and/or corporate non-registered accounts.
• Sale of a business not eligible for the capital gains exemption or the new Canadian Entrepreneurs’ Incentive.
• Disposition of other personal or corporate assets generating capital gains.
• Deemed disposition of assets at death (excluding assets subject to rollover).

Historically, Quebec has harmonized its capital gains inclusion rules to ensure consistency between the Quebec and federal tax systems.

On April 18, Quebec Finance Minister Éric Girard confirmed in an information bulletin that Quebec’s tax legislation and regulations will be harmonized with certain changes announced in the April 16, 2024 federal budget, including the measure to increase the capital gains inclusion rate. The changes to the Quebec tax system will only be adopted after the federal legislation has been passed and will take into account any amendments that may be made. They will come into force on the same dates as the federal measures.

Regarding the changes to the capital gains inclusion rate, the budget states that “Additional design details will be released in the coming months.”

At this stage, three scenarios are possible: (1) the rules will be passed as is; (2) amendments to the rules will be made between now and their official passing (date undetermined); or (3) the rules will simply not be ratified.

Although the capital gain would indeed be taxed more heavily under the proposed rules effective June 25, 2024, the decision as to whether or not to sell a property should be made in light of all the other aspects of your situation. Taxation is only one of the many factors to consider in such a decision. Also, bear in mind that these new rules have been announced but ultimately they must be officially passed to come into effect.

Note that the capital gains inclusion rate for an individual remains at 50% on the first $250,000 of capital gains realized in a year. The new rules would have no impact on unrealized gains below this amount. It should also be noted that each co-owner would benefit from his or her own $250,000 capital gains threshold at a 50% inclusion rate, so for a couple whose spouses are equal co-owners of a property, the new rules would have no impact on the first $500,000 of capital gains realized on its disposition.

Also, in the case of a property for which a capital cost allowance has been claimed (e.g., a rental property), the assessment of the situation is more complex, since the impact of the capital cost allowance recapture on its disposition must also be considered.

Furthermore, in some cases and where applicable, certain strategies could help limit the unfavourable impact of the new rules for an individual.

Finally, on a practical level, selling a property by June 25 seems to be an unrealistic scenario, given all the steps involved in this type of transaction (marketing, financing, due diligence, etc.).

In conclusion, assessing the tax advantages and disadvantages associated with the opportunistic sale of a property before the announced coming into force of the new rules remains highly dependent on the particularities of each individual’s situation. It’s impossible to provide an answer that will apply in all cases. If in doubt, consult your accountant (or other competent professional) on this matter.

Depending on your situation, a capital gain could indeed be taxed at a higher rate under the rules proposed in the latest federal budget effective June 25, 2024. Bear in mind, though, that these new rules have been announced but ultimately they must be officially passed to come into effect.

Note that the capital gains inclusion rate for an individual remains at 50% on the first $250,000 of capital gains realized in a year. The new rules would have no impact on unrealized gains below this amount. That said, to reach this capital gains income threshold, you need to have a personal portfolio of non-registered investments worth several million dollars.

Moreover, unlike with real estate, it’s generally possible to control, in whole or in part, the realization of capital gains in an investment portfolio, which potentially limits the unfavourable impact of the announced new rules for an individual.

Bear in mind, though, that the realization of unrealized gains first and foremost entails the payment of immediate taxes, which reduces the value of short-term investments. So, before making such a decision, an analysis of the long-term profitability of this strategy should be done.

As a general rule, in the case of a corporation, it seems appropriate to consider the following strategies, subject to the tax impacts arising from the dispositions to generate the necessary cash to withdraw from the corporation:

In these two situations, our analyses show that, generally speaking, these strategies should prove advantageous, given the new measures announced in the federal budget.

Our analyses also reveal the following general trends:

In the longer term, it will be interesting to verify the impact of the new measures announced in the federal budget on the following strategies: gift of shares by a corporation, setting up an IPP/RPP, permanent corporate life insurance, etc.

In conclusion, assessing the tax advantages and disadvantages associated with the opportunistic realization of capital gains in an investment portfolio before the announced coming into force of the new rules remains highly dependent on the particularities of each individual’s situation. It’s impossible to provide an answer that will apply in all cases. If in doubt, consult your accountant (or other competent professional) on this matter.

Even if the measures are harmonized in Quebec, the maximum marginal tax rate on capital gains will remain more advantageous than for other types of investment income (interest and dividends).

There’s nothing in the federal budget that should prompt you to incorporate before June 25, 2024.

However, given the changes to the capital gains inclusion rate proposed in the federal budget, you will need to verify whether incorporation is still an attractive strategy for you. Since the federal budget has not yet been passed, it’s difficult to say. The question is certainly valid for the future, but at present, we believe it’s best to be cautious and wait before taking action. Much remains to be clarified, and amendments could be made to the proposed measures before they are ratified.

Incorporation is a major business decision, requiring careful thought and a thorough financial analysis to determine its appropriateness and the best corporate structure to adopt. Over the coming months, we’ll be integrating the new variables and will be better able to advise you in your decision. In the current circumstances, we see no urgency to incorporate.

The new measures announced have little impact on the decision as to whether or not to wind up a management company.

It is generally advisable to consider winding up a management company when the financial expenses represent more than one-third of the overall return on the corporate portfolio. This general trend is not called into question by the proposed changes to the federal budget.