How the New Capital Gains Tax Rate Affects Small Businesses 

A summary of the key changes announced in Budget 2024 and their implications for small business owners 

The federal government has proposed to increase the capital gains inclusion rate from 50% to 66.67% for dispositions of capital property on or after June 25, 2024. This means that more of the profit from selling an asset, such as a business, a farm, or a rental property, will be subject to income tax. However, there are some exemptions and transitional rules that may reduce the tax impact for some taxpayers. Here are some of the main points to consider. 

Transition Year 

If you have a tax year that spans both before and after June 25, 2024, you will need to separate your capital gains and losses into two periods: before June 25 (Period 1) and on or after June 25 (Period 2). You will apply the 50% inclusion rate to your net gains in Period 1 and the 66.67% inclusion rate to your net gains in Period 2, minus any net losses in Period 1. For individuals, the first $250,000 of net gains in Period 2 will be effectively taxed at the 50% rate, as long as they are not offset by net losses in Period 1. 

Exemptions 

The government has maintained or increased some of the existing exemptions for capital gains, such as: 

• The principal residence exemption, which allows you to exclude the gain from selling your home from your income; 

• The lifetime capital gains exemption, which allows you to shelter up to $1.25 million of gains from selling qualified small business shares or farm or fishing property (up from $1,016,836); and 

• The new Canadian Entrepreneurs’ Incentive, which reduces the inclusion rate to 33.33% on up to $2 million of eligible gains from selling shares of a small or medium-sized business. 

Other Considerations 

The proposed changes to the capital gains tax rate will also affect other aspects of the tax system, such as: 

• The employee stock option deduction, which will be based on a one-third deduction of the taxable benefit for stock options exercised on or after June 25, 2024, unless the benefit and the gain are below the $250,000 threshold; 

• The foreign accrual property income of foreign affiliates, which will be subject to the higher inclusion rate for capital gains and losses on certain property; 

• The allowable business investment losses, which will increase from 50% to 66.67% of eligible losses on or after June 25, 2024; 

• The capital cost of depreciable property acquired from a non-arm’s length person or on a change in use, which will be based on the transferor’s capital cost plus 66.67% of the capital gain realized by the transferor, unless an election is made to apply the 50% rate; 

• The withholding tax rate for non-resident dispositions of taxable Canadian property, which will increase from 25% to 35% for dispositions on or after January 1, 2025; and 

• The net capital losses that can be carried back or forward to offset other income, which will be adjusted to reflect the inclusion rate of the year in which they are applied. 

If you are planning to sell a capital property in the near future, you may want to consult with https://GYTD.CPA tax professional to determine the best timing and strategy for your situation. The proposed changes to the capital gains tax rate may have a significant impact on your after-tax income and cash flow.