Jamie Golombek: Prospects embody modifications to the capital beneficial properties inclusion fee, retirement taxes and prime tax bracket
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What may very well be within the federal budget that Finance Minister Chrystia Freeland is delivering on April 16? It’s actually anybody’s guess, however some insights could be gleaned from the federal government’s current pre-budget report, in addition to from numerous pre-budget business newsletters, every providing up their very own predictions and proposals of what is perhaps in retailer.
Let’s assessment some potential tax modifications we might see subsequent month.
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Various minimal tax
Among the many 359 suggestions contained inside the Standing Committee on Finance’s 344-page report is that earlier than continuing with the proposed modifications to the Alternative Minimum Tax, the federal government ought to decide the impression these modifications could have on charitable revenues by conducting an unbiased financial and monetary evaluation.
The AMT imposes a minimal stage of tax on taxpayers who declare sure deductions, exemptions or credit to cut back the tax they owe to very low ranges. In final yr’s federal finances, the federal government introduced that “to raised goal the AMT to high-income people,” a number of modifications can be made to the principles for calculating the AMT, starting in 2024.
The modifications, which had been formally launched in Parliament final summer season, however haven’t but been handed into regulation, embody elevating the AMT fee to twenty.5 per cent from 15 per cent, growing the quantity of earnings beneath which AMT won’t apply ($173,205 in 2024) and broadening the AMT base by limiting extra quantities that scale back taxes. All provinces and territories additionally impose AMT, which is mostly calculated as a proportion of the federal AMT.
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Since AMT can solely come up in 2024 in case your earnings calculated underneath the principles exceeds the $173,205 AMT exemption, most taxpayers don’t have to fret about it. However AMT could be a difficulty for higher-income taxpayers who make charitable presents in 2024 due to a few modifications that particularly goal charitable giving.
First, solely 50 per cent of the donation tax credit score is permitted when calculating the AMT, in response to the at present drafted AMT guidelines for 2024. This alone, nonetheless, isn’t sufficient to trigger AMT, even for high-income donors. It’s solely a priority when a donor earns some tax-preferred earnings or takes sure deductions. For instance, a donor who has a major capital achieve, workouts qualifying worker inventory possibility advantages or has losses carried ahead from a previous yr may very well be affected.
The second AMT adjustment is said to in-kind donations of publicly traded shares, mutual funds or segregated funds to a registered charity. Beginning this yr, the draft AMT laws requires 30 per cent of the capital beneficial properties on securities which can be donated in variety to be included in earnings for AMT functions. Since solely 50 per cent of the donation credit score is now allowed for AMT functions (as defined above), the result’s that the AMT could outcome on some important donations of publicly listed securities in 2024.
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A lot lobbying by the charitable sector has taken place because the new AMT guidelines had been initially launched, and the federal government will hopefully backtrack and reverse these two tax measures that would discourage, or on the very least scale back, massive charitable presents in 2024 and future years.
Lifetime capital beneficial properties exemption
One other suggestion contained within the authorities’s pre-budget report is to extend the lifetime capital beneficial properties exemption (LCGE) that applies on the sale of certified small enterprise company shares, and farm or fishing property. For 2024, the LCGE exempts a bit greater than $1 million of capital gains arising from the sale of any of those properties from tax, with the unsheltered portion taxable on the regular 50 per cent capital beneficial properties inclusion fee.
The Canadian Federation of Agriculture beneficial growing the LCGE for farming properties “to be extra in step with present market values to permit extra exemption on lands bought to new entrants and/or younger farmers.” Equally, the Canadian Federation of Unbiased Enterprise beneficial the LCGE be bumped as much as $1.2 million on the sale of all small and medium-sized enterprises.
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Retirement taxes
A number of of the assorted suggestions contained within the C.D. Howe Institute’s 2024 Shadow Budget had been geared toward supporting Canada’s ageing inhabitants. For these of us nonetheless saving for retirement, the institute beneficial growing the registered retirement financial savings plan contribution restrict by three proportion factors of earnings per yr — from the present 18 per cent to 30 per cent of the prior yr’s earned earnings — over 4 years.
For present seniors, C.D. Howe is looking for an instantaneous one-percentage-point discount of minimal withdrawals from registered retirement earnings funds (RRIFs) for every age, starting with the 2024 taxation yr. That is per the June 2023 findings of a government study on RRIFs, which indicated many seniors really feel that RRIF minimal withdrawals, and their interplay with different income-tested authorities advantages such because the Assured Revenue Complement, restrict their skill to optimize their monetary planning by means of their retirement years.
High tax bracket
The highest federal tax fee of 33 per cent at present kicks in at an earnings of greater than $246,752 for 2024. It’s possible you’ll recall the NDP’s 2021 pre-election platform proposed to extend the highest fee by two proportion factors to 35 per cent.
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Is that this nonetheless on the desk, given the minority authorities and the Liberal-NDP Supply and Confidence Agreement signed again in March 2022? Exhausting to inform, but when it goes by means of, this might carry the highest mixed federal/provincial marginal tax fee to roughly 56 per cent in British Columbia, Ontario and Nova Scotia, and to 57 per cent in Newfoundland and Labrador.
Capital beneficial properties inclusion fee
Within the weeks main as much as each spring finances, we at all times speculate about whether or not the federal government might improve the capital beneficial properties inclusion from 50 per cent to some larger quantity. The NDP’s 2021 election platform proposed a hike to 75 per cent.
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My guess is {that a} common improve within the inclusion fee is unlikely given the current modifications to the AMT for 2024, which make capital beneficial properties taxable at a 100 per cent inclusion fee for top income-earners topic to AMT.
That mentioned, if a change is introduced to the final capital beneficial properties inclusion fee, it might doubtless be efficient as of finances day (April 16). This implies traders who worry a bump within the inclusion fee might contemplate accelerating any planning, together with a possible rebalancing of their portfolios by taking beneficial properties now, thereby locking in a 50 per cent inclusion fee.
Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com.
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