Deputy Prime Minister and Minister of Finance Chrystia Freeland presented the 2024 Federal Budget on April 16, 2024.

Budget changes that do not relate to retirement savings and pension have been covered extensively by many accounting and tax advisory firms and will not be covered in this commentary. This commentary will focus on the impact of the budget changes on our clients’ use of our products and services.

The two (2) items directly related to pension and retirement savings in Budget 2024 are:

• Qualified Investment Rules for Registered Plans ― The government proposes that consultations will begin to review how the qualified investment rules could be modernized to improve the clarity and cohesion between registered plans. This will include reviewing whether annuities should continue to be qualified and whether crypto assets should be included, among others.
• Canada Pension Plan (CPP) Death Benefits ― The government proposes to amend the Canada Pension Plan to provide a top-up to the death benefit for certain individuals, improve children’s benefits, and end entitlement to a survivor’s benefit following a CPP credit split.

The following is a brief summary of three (3) key changes and proposals in Budget 2024:

• Increases the capital gains inclusion rate from 1/2 to 2/3, effective June 25, 2024 (up to $250,000 of annual gains for individuals will continue to benefit from the 1/2 inclusion rate).
• Raises the lifetime capital gains exemption to $1.25 million and introduces a new 1/3 inclusion rate for up to $2 million of certain capital gains realized by entrepreneurs.
• Confirms previously announced alternative minimum tax (AMT) proposals effective January 1, 2024, but softens the impact of these proposals on charitable donations to allow individuals to claim 80% instead of the previously proposed 50% of the charitable donation tax credit when calculating AMT.

Due to the proposed increases in the capital gains inclusion rate from 1/2 to 2/3, retirement savings programs such as Individual Pension Plans (IPPs) or Retirement Compensation Arrangements (RCAs) that are commonly used by business owners and incorporated professionals would have an enhanced appeal as a result of the Budget 2024 tax changes. For high net worth and highly compensated individuals, the ability for an IPP or RCA to extract additional pre-tax assets from a corporation, and to tax-shelter any potential realized capital gains from investments, has become a more viable and feasible solution after Budget 2024.

Investing in equities within IPPs and RCAs would be more desirable for the sheltering of such capital gains from the higher 2/3 inclusion rate in Budget 2024. Furthermore, the passive income grind on the $500,000 small business deduction (SBD) limit, based on passive income realized in a corporation, will be a more significant challenge for business owners. The level of realized capital gains needed to breach the $50,000 allowable threshold will now be lower with the higher capital gains inclusion rate. By using an IPP or RCA, the income realized in the IPP or RCA would not impact the SBD limit.

The fact that 80% of the donation tax credit can now be claimed by those paying alternative minimum tax as opposed to the 50% that was originally proposed is good news for charities and individuals who plan on donating their life insurance policies. Westcoast Actuaries provide services on the Fair Market Valuation of life insurance policies for charitable gifting purposes.

If you have any specific questions pertaining to Budget 2024 or if you would like to discuss the use of IPPs and RCAs to mitigate the impact of the higher capital gains inclusion rate in the new budget, please contact our actuaries and consultants by calling us at (604) 730-1898 or sending us an email at info@WAInc.ca.

_{^{This content is for general information only  As it is impossible to include all situations, circumstances and exceptions in a commentary such as this, a further review or study should be undertaken with respect to the application of the Budget 2024 proposals to the reader’s own situations and circumstances. Every effort has been made to ensure the accuracy of the information contained in this commentary. However, because of the nature of the subject, no person or firm involved in the preparation or distribution of this commentary accepts any liability for its contents or use.}}