What investors need to know about the 2024 federal budget

On Tuesday April 16, 2024, Finance Minister Chrystia Freeland tabled the latest Federal Budget in Parliament, subtitled: “Fairness for Every Generation”.  The summary below highlights some of the provisions relevant to savings, investment and financial planning. You can find the full Budget details at the Government of Canada website.

• Personal tax changes
• Housing affordability
• Investing

Please note: A Budget is a statement of the governing party’s intentions and are considered proposals until they are passed into law.

Personal tax changes

Capital gains inclusion rate

Currently when a capital gain arises, half of the gain is untaxed and the other half is included in taxable income. The one-half inclusion rate also applies to capital losses. Budget 2024 proposes to increase the inclusion rate to two-thirds:

·       For corporations and trusts, on all capital gains realized in a year, and

·       For individuals, on the portion of capital gains realized in the year that exceed $250,000, applicable to capital gains realized on or after June 25, 2024.

For those who claim the employee stock option deduction, there would be a one-third deduction of the taxable benefit to reflect the new capital gains inclusion rate. The individual would then be entitled to a deduction of one half the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains.

Net capital losses of prior years would continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the capital gains being offset. In this way, a capital loss realized prior to the rate change would fully offset an equivalent capital gain realized after the rate change.

Two different inclusion rates would apply when June 25, 2024 is within a taxpayer’s tax year. Separate capital gain/loss calculations would be required for ‘Period 1’ before the effective date, and ‘Period 2’ thereafter, with the higher inclusion rate applying to the latter period. For individuals, the $250,000 threshold would be fully available in 2024 (i.e., it would not be prorated), and would apply only to net capital gains realized in Period 2.

Alternative Minimum Tax

Budget 2023 announced changes to the Alternative Minimum Tax (AMT) calculation, for which draft legislation was published for consultation. Following from that, further amendments are proposed in this Budget 2024, including:

·       Revising the tax treatment of charitable donations to allow individuals to claim 80% (instead of the previously proposed 50%) of the charitable donation tax credit when calculating AMT;

·       Allowing full deductions for the Guaranteed Income Supplement, social assistance, and workers’ compensation payments;

·       Allowing individuals to fully claim the federal logging tax credit under the AMT;

·       Fully exempting Employee Ownership Trusts from the AMT; and

·       Allowing certain disallowed credits under the AMT to be eligible for the AMT carry-forward (i.e., the federal political contribution tax credit, investment tax credits, and labour-sponsored funds tax credit).

These amendments would apply to taxation years that begin on or after January 1, 2024 (i.e., the same day as the broader AMT amendments).

Lifetime Capital Gains Exemption

The Lifetime Capital Gains Exemption (LCGE) protects against the taxation of capital gains on the disposition of qualified small business corporation shares and qualified farm or fishing property. The exemption is $1,016,836 in 2024 and is indexed to inflation. The Budget proposes to increase the LCGE to apply to up to $1.25 million of eligible capital gains. This measure would apply to dispositions that occur on or after June 25, 2024. Indexation of the LCGE would resume in 2026.

Housing affordability

30-Year Amortizations for First-Time Buyers Purchasing New Builds

Budget 2024 announces the government will allow 30-year mortgage amortizations for first-time home buyers purchasing newly constructed homes. This new insured mortgage product will be available to first-time buyers starting August 1, 2024.

Home buyers’ plan

Budget 2024 proposes to increase the withdrawal limit from $35,000 to $60,000. This increase would also apply to withdrawals made for the benefit of a disabled individual who does not have to be a first-time buyer. This measure would apply to the 2024 and subsequent calendar years for withdrawals made after Budget Day.

As well, the Budget proposes a temporary deferral of the start of the 15-year repayment period by an additional three years for participants making a first withdrawal between January 1, 2022, and December 31, 2025.

Canada Secondary Suite Loan Program

Homeowners may have a basement, garage or other unused liveable space they would like to convert into a rental suite. While the ultimate result may provide a net positive impact, the upfront cost and expected administrative red tape may dissuade them from taking action.

Budget 2024 proposes to provide $409.6 million over four years, starting in 2025-26, to the Canada Mortgage and Housing Corporation to launch a new Canada Secondary Suite Loan Program, enabling homeowners to access up to $40,000 in low-interest loans to add secondary suites to their homes.

Investing

Mineral Exploration Tax Credit

Flow-through shares allow resource companies to renounce or “flow through” tax expenses associated with their Canadian exploration activities to investors, who can deduct the expenses in calculating their own taxable income. As currently legislated, the Mineral Exploration Tax Credit will expire on March 31, 2024. Budget 2024 extends eligibility for one year, to flow-through share agreements entered into on or before March 31, 2025.

Qualified investments for registered plans

Since 1966, qualified investment rules have defined what may be held in registered accounts. These rules have been incrementally expanded to include more than 40 types of assets and to reflect the introduction of new types of registered plans (including TFSAs in 2009 and FHSAs in 2023).

However, this incremental approach has resulted in qualified investment rules that can be inconsistent or difficult to understand in some cases. Budget 2024 invites stakeholders to provide suggestions on how the qualified investment rules could be modernized on a prospective basis to improve the clarity and coherence of the registered plans regime. Stakeholders are invited to submit comments to QI-consultation-PA@fin.gc.ca by July 15, 2024.