The dis-integration of our tax regime?

Written by Matthew Bilmes

On Tuesday, April 16, 2024, Deputy Prime Minister and Finance Minister Chrystia Freeland tabled the 2024 Federal Budget. They called it “Fairness for Every Generation”.

While the budget contained many significant amendments to existing tax legislation, none were more far reaching than the decision to increase the capital gains inclusion rate from 50% to 2/3 on capital gains realized in a corporation or trust and from 50% to 2/3 on the portion of capital gains realized in a year that exceed $250,000 for individuals. For many Canadians of every generation who planned their personal and corporate affairs based on the existing 50% capital gains inclusion rate, this sudden change may actually seem unfair.

Canadian taxpayers of every age and in every tax bracket likely made a choice at one point to invest in an asset they one day hoped to sell at a profit. They expected that profit to be taxed at somewhere close to 25%. If they knew one day that that profit would be taxed at closer to 35%, would that same investment decision have been made? Maybe the younger generation would have put more equity into their home since they would have the principal residence exemption to ultimately shelter their capital gain in full. Maybe the generation approaching retirement would have chosen to invest in interest or dividend producing securities instead of high growth potential securities, which offer more security albeit with a higher tax burden.

Our tax team at DGC has “run the numbers” and it looks like the new capital gains inclusion rates would materially affect our ability to rely on the principal of tax integration to plan one’s affairs.

The concept of integration is a fundamental principal of Canadian tax policy that has guided tax planning strategies for decades. It follows that personal and corporate tax rates should be harmonized so as to eliminate any advantages and disadvantages in the application of tax between individuals, corporations and trusts. It used to be a given that investing through a corporation is materially similar over the long-term from a tax perspective than investing personally. Now, that may not always be the case, especially since the current government has made the decision not to grant the same $250,000 annual threshold relief to corporations. The result is an increased tax burden that can reach as much as 9%.

There is no “one size fits all” solution for each client, but our team is here with the tools necessary to help you navigate the monetary impact that these rules may have on your existing tax structure.

For example, would it be worthwhile to prepay tax at a lower rate versus holding on to investments so as to continue to take advantage of a tax deferral? We are happy to address this question, and others that stem from the 2024 Federal Budget, well prior to June 25, 2024, when the rules regarding the new capital gains inclusion rate start to apply.