Capital Gains Inclusion Rate
The inclusion rate for capital gains is proposed to increase from 50% (1/2) to 66.67% (2/3) for dispositions of capital property after June 24, 2024. The new inclusion rate applies to net capital gains exceeding $250,000 per year for individuals and to all net capital gains realized by corporations and most types of trusts. It is important to note that this tax change is still a proposal, and the associated draft legislation has yet to be passed into law. For more information on this proposed change, see our tax article from a couple of months ago.
On January 31, 2025, the Department of Finance announced that it intends to introduce legislation to change the effective date of the change in the capital gains inclusion rate to January 1, 2026.
Employee Stock Options
To align the taxation of employee stock options with the proposed changes to the taxation of capital gains, the stock option deduction is proposed to be reduced from 50% (1/2) to 33.33% (1/3) of the taxable benefit realized after June 24, 2024.
As a result, 66.67% (2/3) of the employee stock option benefit will now be taxable. Note that this change only applies to employee stock option benefits over the annual limit of $250,000 for qualifying options. An election is available to increase the deduction to 50% on qualifying option benefits up to that $250,000 annual limit.
Alternative Minimum Tax
What is the Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) impacts Canadian taxpayers by ensuring that high-income individuals and trusts pay a minimum amount of tax each year, notwithstanding that they have access to various tax deductions and incentives. This is achieved by adjusting taxable income, such as adding back certain deductions and incentives like the Lifetime Capital Gains Exemption and the employee stock option deduction.
Most provinces, including British Columbia, have their own provincial AMT based on a percentage of the federal AMT. The AMT paid can be carried forward as a credit for up to seven taxation years and can be applied to reduce future income taxes where the regular federal income tax exceeds the federal AMT for the particular subsequent year. Changes to the AMT Regime
- The AMT Rate has increased to 20.5%, a significant rise from the previous rate of 15%.
- The Basic Exemption under AMT has substantially increased, aligning with the fourth federal income tax bracket (indexed annually to inflation). This threshold is $173,205 for the 2024 tax year, a substantial increase from the previous $40,000 exemption threshold.
- The calculation of Adjusted Taxable Income (ATI) for AMT purposes will change in the following key ways:
- The inclusion rate for capital gains, allowable capital losses and gains from listed personal property increases to 100% (from 80%);
- The employee stock option deduction is no longer available; this effectively increases the inclusion rate for taxable stock option benefits to 100% (from 80%);
- The inclusion rate for capital gains on donations of:
- Publicly listed securities increase to 30% (from 0%);
- All other property increases to 100% (from 50%)
- The inclusion rate for business investment losses decreases to 50% (from 80%);
- The deduction for certain expenses is limited to 50%, including most employment expenses, interest and carrying charges incurred to earn property income, investment counsel fees, moving expenses, childcare expenses, the disability supports deduction, and the Northern Residents' deductions;
- The deduction for non-capital losses and limited partnership losses of other years is limited to 50% (from 100%), and
- The inclusion rate for capital losses carried forward and back is reduced to a maximum of 50% (from 80%).
- Non-refundable tax credits will generally be limited to 50%, with the key exception of the charitable donations tax credit, which will be limited to 80%.
AMT Changes Affecting Trusts
The changes have extended to include additional trusts exempted under the AMT rules. Notably, Graduated Rate Estates, Employee Ownership Trusts and certain Indigenous trusts now fall under this category. Also, Qualified Disability Trusts are now eligible for the basic AMT exemption (described above). Other inter vivos trusts, including family trusts, will remain subject to the AMT without benefiting from the basic exemption.
Impact of AMT Changes
The changes to the AMT beginning in 2024 should ensure that lower—and middle-income taxpayers are not subject to it, while more high-income taxpayers will be. The tax burden will increase significantly for those subject to it. Planning will become even more critical to ensure a strategy can be deployed to reasonably ensure the recovery of AMT paid within the 7-year carryforward period.
Capital Gains Exemption
From January 1 to June 24, 2024, the capital gains exemption for qualified small business corporation shares and qualified farm or fishing property was $1,016,836. Commenced on June 25, 2024, when the capital gains inclusion rate increase takes effect, this exemption is $1,250,000. This exemption will once again be indexed to inflation starting in 2026. Note that the legislation has not yet been enacted.
Underused Housing Tax (UHT)
Starting in 2022, residential real estate owned by non-residents or non-Canadians that is vacant or underutilized will be subject to a new national tax of 1% on the assessed value annually. Proposed changes to the legislation have been introduced so that most Canadian owners of residential property would not have to file a UHT return or pay the tax.
Under the enacted rules, the legal owner of the residential property would need to file an annual declaration unless they are an "excluded owner" such as:
- an individual who is a Canadian citizen or permanent resident of Canada and holds a direct interest in the property
- a corporation incorporated in Canada and listed on a Canadian stock exchange
- a registered charity
- an Indigenous governing body or a corporation owned by an Indigenous governing body
- certain other public service bodies (e.g., universities, public colleges, school authorities, hospital authorities)
An owner who is not excluded can be exempt from the tax if the residence in question is the primary place of residence of:
- the owner (if the owner is an individual)
- the owner's spouse or common-law partner
- a child of the owner or the owner's spouse or common-law partner, but only if the child is in Canada for authorized study and the occupancy relates to that purpose
- a tenant occupying the residence under a written agreement at fair rent
An exemption is also available for residential properties owned by specified Canadian corporations, which are Canadian corporations of which foreign individuals or corporations own less than 10% of the votes and value of their shares.
Additional exemptions for vacation/recreational properties would apply to properties:
- located in an area of Canada that is not an urban area within either a census metropolitan area or a census agglomeration having 30,000 or more residents.
- personally used by the owner (or the owner's spouse or common-law partner) for at least four weeks in the calendar year.
An owner eligible for any of the above exemptions would claim the exemption in the annual return that they are required to file with the CRA for the residential property.
The 2024 Underused Housing Tax filing and payment (if an exemption is unavailable) is due by April 30, 2025.
Employee Ownership Trusts (EOTs)
Effective January 1, 2024, new rules have been proposed to facilitate using an EOT to acquire and hold shares of certain businesses. The maximum deferral period for recognizing the capital gain upon a sale to an EOT is ten years, as opposed to the usual five years, and if certain conditions are met, the first $10 million of capital gains may be exempt from taxation for sales from January 1, 2024, to December 31, 2026.
We suggest contacting your Crowe MacKay tax advisor if you are considering transferring ownership of your business to your employees and have questions about EOTs.
