Strategic Insights: Adapting to the 2024 Federal Budget Changes

Anything that we're buying and we're selling for more money would have a capital gain associated with it, even if it's personal use assets. In Canada, as an individual, our tax rates go from zero when we started with no income all the way up to 54% plus for the highest tax rate individuals, which about $240,000. So if you're earning over $240,000 as an individual, your tax rates would be over 54%. Good afternoon, good morning, whatever time it is that you're checking this out. Welcome to the Wealthy Entrepreneur Podcast. My name is Bob Gover. I will be your host for today. And just as a little bit of a background, why is it that we're here? Well, this is a podcast where we dissect the elements that contribute to entrepreneurial success, from mindset and leadership to profits and revenue. This particular episode that we're recording today is going to be focused on the 2024 Canadian federal budget release because it does have some pretty dramatic impacts on our small business community. So I want to walk you through this. So to essentially put it in perspective, every single year in April, typically in April, the federal government in power releases their budget that comes out during the year. Now, a lot of times in this budget, it has a lot to do with finances, and in this particular one, it does. And a lot of times they talk about some of the new rules that are going to change, legislation that changes. They talk about tax rates changing, although I'll give you an insight. No tax rates were proposed to change as far as personal and business tax rates, but there are some pretty dramatic changes that they proposed in this year for 2024, and some of them will have an impact on everybody. And for anyone who's a business owner, it will have an impact on you in some way, shape or form. So I want to walk you through what the 2024 federal budget release looked like. So although, and it was April 16, 2024, when the Deputy minister and minister of Finance tabled the 2024 budget. Again, lots of information in there, but a few of the major highlights, and I'll get into those a little bit deeper in a minute. But the one that I believe is going to have an impact on everybody is the new inclusion of the capital gains tax rate. So although personal and business tax rates didn't change, they did change the inclusion rate of a capital gain. So let me just put that into context for you. Typically, what was happening is that and maybe I'll even talk about marginal tax rates first in Canada as an individual, our tax rates go from zero when we started with no income all the way up to 54%. Plus for the highest tax rate individuals, which about $240,000. So if you're earning over $240,000 as an individual, your tax rates would be over 54%. Now, let's just assume it's 50% for the moment because that's way easier math for me and for you to follow along. But typically what would happen is if you've got a capital gain, so you've bought something for, you know, a thousand dollars, you sold it for $2,000, that would mean that the increase in value was $1,000. Now, what would normally happen prior to this budget release is that 50% of that capital gain would get included. So 50% of a thousand, which is $500. So a thousand dollar gain, 50% taxable, it's $500 at your 50% tax rate, which would result in about $250 owing about a tax rate of 25%. So again, half of the normal tax rate, 50 was coming in and we were taxing capital gains at half of the normal rate. Half of that gain was being included. So we would typically see half the tax on that type of income. So 25% or on $1,000, $250. What they've done now is they've come back and said like they did years ago, we're not going to include capital gains at half anymore. We're going to include it at 2/3. So 67%, which means that for that thousand dollars of gain, they're going to include 67% of that income. And 67% of that income, which was $670 of a gain, would be taxed at your highest marginal rate, which again is 50%. So let's call that right around 33%. So as you can see, this has had an impact on our personal taxes by a tune of about 8%. Now, there's some exemptions that need to be understood as far as a personal income inclusion goes. So, you know, where would we get, where would we report any personal income that's capital gain? Well, for selling a property that's not our principal residence, that would have a capital gain. If we're selling investments that would potentially have a capital gain. Anything that we're buying and selling. So like shares of our business, for example, that would have a capital gain. If we're selling assets inside our business, that would have a capital gain. I'm going to talk about the business one In a second. But ultimately, anything that we're buying and we're selling for more money would have a capital gain associated with it. Even if it's personal use assets. If we're buying it and we're selling it for more money, unless it's a really insignificant value, we're going to pay now 33% tax versus 25. So it does have an 8% increase in tax rate on us. Now what I will say is that as an individual there is an exemption and the, the exemption is that the first $250,000 are going to be exempt from this type of tax rate increase. So the first $250,000 that you sell as an individual will only be taxed at 50% inclusion. Anything above that would be taxed at the 67%. So a really good example here. Many of us, you know, over the years have accumulated a secondary property or a vacation property. Now when we used to have to pay 25% tax on the gain, we're now having to pay 33% tax on the gain. So it might have some pretty substantial income tax implications. That's an extra $8,000 for every hundred thousand dollars of taxable gain that we have in place. So it could have some pretty significant tax implications in there. So now let's, that's the personal one. There's a $250,000 exemption. You know, there may potentially be ways that we can avoid this in the future. And we were waiting for more details to be released from the Minister of Finance and they will continue to write out supplementary documents. But one of the areas that we were able to minimize capital gains tax or at least spread it out over multiple years is when we take what's called a capital gains reserve. So for example, we sell a building, we sell it for a million dollars if we only take 20% of the cash up front. So $200,000 on that million dollar sale and we finance so vendor take back 80% of that value or $800,000. We only were required to claim 20% of the gain. Now, 20% is the minimum amount that we would have to claim over a period of time. So 20% over five years is the maximum that we can defer that gain. Now the question that we're going to be asking and that we're going to be investigating is whether or not that sort of gain will reduce our taxable income inclusion on our personal tax return. So again, for example, if we have a gain of $1 million on a property, we want to utilize the capital gains reserve it brings our income from capital gains down to $200,000 for the year. We're going to spread that $200,000 over a five year period. And although there's discussion about it and there's debate, my feeling is that the capital gains reserve will still allow us to defer that gain out over five years and and not be included in the 250 plus calculation, but in fact be calculated in the under 250, allowing us to save that 8% of extra tax on this transaction. So what this means is we need to be planning appropriately if we're going to be selling significant assets or assets with significant value, including our business. So something to keep in mind. Now the other area to keep in mind, and I know we're in the end of April when this is going to get released, but there is a date of effect that this is going to take place, which is going to take place June 25th. So if you are an individual who has a lot of accumulated gains in your investment portfolio, you may be looking at this being a time where you want to trigger some of those gains. Now, if you have the opportunity to trigger some gains there and eliminate other income. So for example, you're a business owner, you've got a bunch of investments that you own, you want to trigger the gains. And yes, it's going to create taxable income in 2024. But if you can limit your dividends that you take out of the company, or there are other tax planning opportunities that we could do, we could look at claiming a dividend in the following year. You take money out. There are opportunities to manage your income inclusion related to triggering these capital gains. So June 25, 2024 is D Day. For if you sell anything prior to June 25, so June, anything before and up to June 24, if you sell anything up till that point, it's still going to be the 25% rate. If you sell anything beyond June 25, 2024 and you sell more than $250,000 worth as an individual, you're going to be taxed at a higher rate. Now let's talk about the business side of things. So although there's this exemption which is super helpful for individuals who don't maybe necessarily trigger a substantial amount of capital gains over a period of time or on a regular basis, it will likely help us keep our tax rate at 25% or lower. If you have substantial net worth and you have assets that are to be sold either, you know, in the future or upon death, that $250,000 might not be enough, but inside your business you are not going to get that $250,000 exemption. So for example, if in my business I sell a vehicle and in that sale I make $10,000 off of a car that will be taxed at that new increase 67% if I have that transaction after June 25th. Now, if I sell it prior to June 25th or any date up to the end of June 24th, I would only have to claim income at that 25% tax rate or that 50% inclusion. So planning opportunity here, guys. If you have assets that you are thinking of selling, now's a really good time. If you sell them now, you could avoid that increase in tax rates, put more money in your pocket. So that's something that we definitely want to make sure that you're aware of. So again, as a recap on the capital gains, capital gains rates are going from a 50% inclusion up to a 67% inclusion on anything as an individual above 250,000. If you are a business in any form or fashion or a trust, you're going to be paying full tax on anything that is a capital gain triggered after June 25th. Planning opportunity. One, let's look at how we can spread those gains out over a period of years, especially as an individual. And two, is there a way that we could maybe trigger some of these tax implications prior to June 25th to avoid that increased tax rate and increased inclusion rate for capital gains? So that was a big one, guys. This was a big one related to the budget release and one that definitely not favorable for. For many individuals and business owners. You know, when we think of selling our business down the road, we are going to have an exemption, hopefully if we qualify. If you're not sure if you qualify for that exemption, make sure you talk to us. It's essentially that you're a Canadian controlled private corporation where the majority of your assets greater than 90% are used in active business at the time of sale and over a two year period leading up to the sale, that greater than 50% of the assets were always actively used in business. If we qualify for that, we get some exemption. If we don't qualify or if we sell our business for more money, we're now going to be paying capital gains tax at that two thirds rate versus that half rate. So just something to be aware of now, it wasn't all bad. Okay, so the budget did come out with some benefits. The one benefit that came out was that the lifetime capital gains exemption is going to be increased. So any disposition that takes place after June 25, 2024, so they use the same date as the capital gains inclusion rate. So lifetime capital gains exemption will be increased to $1.25 million any time that you sell proceeds after June 25, 2024. So here's a planning tip for you as well. One, anyone who doesn't utilize a family trust, think of that $1.25 million at 33%, which I'm actually going to calculate as I'm chatting here. But think of that $1.25 million inside a family trust. You can actually increase that per individual. That's a beneficiary in the trust. So for each individual, you're looking at tax savings on that 1.25 million of 412,500. That's a pretty big deal. If you have four family members like I do, that's tax savings by introducing a family trust of $1,650,000. So that's saving tax on capital gains when we eventually sell. So very important that we take advantage of that sort of opportunity. So family trusts just became a little bit more important because of the tax savings opportunity related to those. So again, if you're looking at selling your business, make sure that if it's closing anytime soon, you might want to push it back to June 25th. If your lifetime capital gains exemption needs to be increased to help save you money, especially if it's already owned in a family trust and you're going to maximize your lifetime capital gains exemption for your family members when you sell, you may want to push back the date. So that's another planning opportunity for you as well. Now, the lifetime capital gains exemption, for years they've talked about maybe taking it away. It seems as though it's here to stay for the time being anyway, as they've indicated that it will go up to that 1.25 for anything after June 25th, and it will continue to be indexed to inflation from January 1, 2026 forward. So they've put it in there. It's written in there that it's here to stay for the time being until we have any political party changes or some motives change. So right now it looks like they want to continue to incentivize small business and entrepreneurship. Okay. So one other thing that they did incentivize for entrepreneurs is a new taxable capital gains inclusion rate. But I got excited about it at first, and then I got a little less excited because you have to jump through a few hoops and There's a few exclusions related to who would potentially qualify for this. So this is above the lifetime capital gains exemption. You have a lifetime now up to $2 million in capital gains that would be taxed at one third the regular rate. So we've got our 1.25 million lifetime capital gains exemption. The $2 million following that would be included at one third of as a tax inclusion versus the 2/3 inclusion. And that full $2 million would be realized by any year at 2023 and after, or sorry, 2034 or after. Now this is where it started to get a little interesting because I thought, oh wow, isn't it this great? They're once again incentivizing entrepreneurship, which I love to see. But then they started to walk through who would be included in being an eligible entrepreneur in this category. So you had to be a founding investor. You have to have had shares for a minimum of five years and you have to have more than 10% of the voting rights and value of the corporation. That seems like no problem for many entrepreneurs. They're starting out with a cost base of zero and they've owned it from day one. The individual must be actively engaged on a regular, continuous and substantial basis in the activities of business. Business, no problem. Entrepreneurs are tend to be around the clock. The shares must have been obtained at fair market value consideration. Again, many of us started the corporation, so at $100, that's their fair value. No problem. But there was this disentitlement category and there's going to be more information coming out. But they identified a few categories, including myself, that would be disentitled to ince receive this incentive opportunity. So they had a few categories that talked about many professionals. Solopreneurs, those operating in financial insurance, real estate, food, accommodation, arts, recreation or entertainment sectors, and those providing consulting or personal care services. So all of those categories are not eligible for this additional incentive. Now, in many of the cases, if we're talking about solopreneurs, they wouldn't likely get above the lifetime capital gains exemption anyway. But once you start building a business, getting it above the 1.25 million per individual. Again, let's look at family Trust. Let's see if we can multiply that lifetime capital gains exemption. But when you get into this, if you are an entrepreneur, it likely seems like they're incentivizing people in the tech space, which is wonderful, but disentitling a lot of individuals who aren't in there. So we don't really love that. Again, it was a nice idea to start out with. And maybe as they continue to evolve this out and write out the regulations, they'll allow more people to be part of it. But as of right now, it seems like pretty much anybody who's not in tech or maybe health care is really not allowed to participate in that. Okay. And the last positive sort of incentive that I wanted to share is that there is an employee ownership trust tax exemption. So this was identified and proposed in the 2023 budget, but it wasn't really talked about up until now. So they provided a little bit more clarity in that an individual may be able to claim an exemption for up to $10 million in capital gains from the sale if the individual like you and I is selling the business to a trust, that is going to be where all the beneficiaries are your employees. So a little bit of cost associated with this, but if we're talking $10 million in gains exemption and we're talking at a 33% tax rate and savings, that's $3.3 million in tax savings. It's likely worth the investment and cost. So this would be, if you have a business essentially up to $10 million or more on the sale, you could sell it to your employees and get access to a gains exemption from this sale. So ultimately, it appears as though they're looking to incentivize business owners to transition their businesses to their employees, maybe not sell to foreign buyers. But it does appear as though that is going to be a pretty good opportunity in the future. And I've already had a few calls about this employee ownership trust exemption down in the United States. It's maybe a little bit more common if you haven't esop employee share ownership plan. It's more of a process down in the US where funds like private equity funds would fund the buyout of individuals who are on a team to buy out the original owner. And it seems to be quite successful. And when I worked with Tony Robbins, he was endorsing these down in the US with some of his partners who are running that. So it seems like we're getting a little bit more incentive in the future to maybe continue to leave businesses in the hands of those who've helped build it, which is wonderful. I like that idea a lot. So more information to come there. A few other notable items, but not as big as the capital gains or the lifetime capital gains exemption. Increase a deduction for trades People Travel, $4,000 in eligible travel and relocation expenses per year. Now for anyone in the trades, that was pretty interesting. There's some an accelerated capital cost allowance. So that's the depreciation of a building related to purpose built rental housing. So of course we know across Canada there's an incentive to continue to build housing. We're short of housing. The US Is also short of housing. So the government there is also looking to incentivize it. But here what they're doing is they're incentivizing re or purpose built rental housing for the developer to incentivize creating more developments and more housing right now. So typically the depreciation rate on a building would have been 4%. They're actually accelerating that to be 10% or eligible purpose built rental projects which include four or more private apartment units or at least 10 private rooms or suites in a property in which 90% of the residential units are held for long term rentals. So not so much Airbnb or short term rentals, but long term rentals and 90% of those units need to be held or created for that. So for any of my developer friends who are out there or any of my construction companies who are out there, there is an incentive to have an increased capital cost allowance or depreciation rate on purpose built housing on any construction starting after the announcement, which was April 16, 2024 and before April 1, 2031 that need to be available for use by January 1, 2036. So that's a pretty decent incentive in there. It makes a lot of sense for my developer friends who've been holding off on some projects, definitely some more upfront tax deductibility related to that. That's all I'm going to jump into related to the budget release. But I think it's really important. There's some pretty substantial impacts for many individuals and specifically individuals who are here, which is our business owners, our entrepreneurs, capital gains impacts that are going to take place January 25th for forward. So if you have any planning opportunities or if you're having capital gains that you know are going to get triggered in the future and you want to talk about opportunities to keep that lower or are there ways that we can help structure you, your business, your personal affairs to help avoid any of that 33% versus 25 tax rate, feel free to reach out, throw a comment in here for anything that's valuable for you guys that you've learned or you gained from this. Share this out. I know we've done a document that we're calling our tax brief that has a budget summary. I'm going to include the link for that below. We also have that on our website. Go grow CPA CA to always make sure that you're getting access to the best information and the insights needed. Because in many of these instances with a June 25 deadline, we need to take some action sooner than later if we want to take advantage of up these tax rates that are currently in place before they negatively change on us. If you know somebody that would benefit from hearing this information, tag them, share with them. Make sure you like this. We will make sure that every single week we're bringing you valuable insights for you and your business. I'm talking about taxes side, but I'm not always talking about tax. We're always typically talking about how we can grow and scale our business in a more successful way. Paying too much tax is one of the greatest costs of not building our business in an incredible way. So we want to eliminate that in every instance we can. Guys, my name is Bob Govreau. I am your host of the Wealthy Entrepreneur podcast. Make sure you follow us. We will launch another episode again next week. I appreciate you being here, I appreciate your feedback and continue to make a huge impact in everything you do as a business owner. Have a fantastic day guys and I look forward to seeing you again next week.