5 tax changes to watch for in the upcoming federal budget

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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 may be gleaned from the federal government’s current pre-budget report, in addition to from varied pre-budget business newsletters, every providing up their very own predictions and proposals of what is likely to be in retailer.

Let’s evaluation some potential tax adjustments we may see subsequent month.

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Various minimal tax

Among the many 359 suggestions contained throughout the Standing Committee on Finance’s 344-page report is that earlier than continuing with the proposed adjustments to the Alternative Minimum Tax, the federal government ought to decide the influence these adjustments can 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 price range, the federal government introduced that “to raised goal the AMT to high-income people,” a number of adjustments can be made to the foundations for calculating the AMT, starting in 2024.

The adjustments, which had been formally launched in Parliament final summer time, however haven’t but been handed into regulation, embrace elevating the AMT price to twenty.5 per cent from 15 per cent, rising the quantity of earnings beneath which AMT won’t apply ($173,205 in 2024) and broadening the AMT base by limiting extra quantities that cut 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 beneath the foundations exceeds the $173,205 AMT exemption, most taxpayers don’t have to fret about it. However AMT may be a difficulty for higher-income taxpayers who make charitable presents in 2024 due to a few adjustments 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, nevertheless, is just not 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 positive aspects on securities which can be donated in form 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 end result on some vital donations of publicly listed securities in 2024.

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A lot lobbying by the charitable sector has taken place for the reason that new AMT guidelines had been initially launched, and the federal government will hopefully backtrack and reverse these two tax measures that might discourage, or on the very least cut back, massive charitable presents in 2024 and future years.

Lifetime capital positive aspects exemption

One other advice contained within the authorities’s pre-budget report is to extend the lifetime capital positive aspects 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 positive aspects inclusion price.

The Canadian Federation of Agriculture really helpful rising the LCGE for farming properties “to be extra according to present market values to permit further exemption on lands offered to new entrants and/or younger farmers.” Equally, the Canadian Federation of Unbiased Enterprise really helpful 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 getting older inhabitants. For these of us nonetheless saving for retirement, the institute really helpful rising 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 asking for a right away one-percentage-point discount of minimal withdrawals from registered retirement earnings funds (RRIFs) for every age, starting with the 2024 taxation yr. That is in step with 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 capability to optimize their monetary planning via their retirement years.

High tax bracket

The highest federal tax price 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 price 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? Laborious to inform, but when it goes via, this might carry the highest mixed federal/provincial marginal tax price to roughly 56 per cent in British Columbia, Ontario and Nova Scotia, and to 57 per cent in Newfoundland and Labrador.

Capital positive aspects inclusion price

Within the weeks main as much as each spring price range, we at all times speculate about whether or not the federal government may improve the capital positive aspects inclusion from 50 per cent to some increased quantity. The NDP’s 2021 election platform proposed a hike to 75 per cent.

My guess is {that a} normal improve within the inclusion price is unlikely given the current adjustments to the AMT for 2024, which make capital positive aspects taxable at a 100 per cent inclusion price for prime income-earners topic to AMT.

That stated, if a change is introduced to the overall capital positive aspects inclusion price, it will probably be efficient as of price range day (April 16). This implies buyers who worry a bump within the inclusion price may take into account accelerating any planning, together with a possible rebalancing of their portfolios by taking positive aspects now, thereby locking in a 50 per cent inclusion price.

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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