2024 year-end tax planning for you and your business

If you or your business have realized capital gains in 2024 from non-registered investments, and have other investments with unrealized losses, consider selling these investments before the year-end to trigger capital losses. These losses can offset taxes owing on capital gains realized during 2024. They can also be carried back to any of the three prior tax years to reduce capital gains in those years or can be carried forward to future years. Note that the superficial loss rules may deny the capital losses if you or an affiliated person acquire the property or an identical property within 30 days before or after the sale. 

Although the proposed increase to the capital gains inclusion rate is not yet law, planning now for this potential change is important. Under the proposed legislation, the capital gains inclusion rate for individuals, trusts, and corporations will increase to 66.7% (from 50%) for capital gains incurred on or after June 25, 2024.  Individuals, graduated rate estates and qualified disability trusts will remain subject to the 50% inclusion rate on up to $250,000 in capital gains realized each year. Therefore, it may be beneficial to trigger some capital gains each year up to this threshold to access the lower inclusion rate. 

During the 2024 transition year, the inclusion rate that will generally apply to the capital gains will depend on whether you incur those gains/losses before or after June 25, 2024. If capital losses are carried back to prior years, they’ll be adjusted to reflect the inclusion rate for the year in which the capital loss is applied. For example, if a capital loss is generated in 2024 at an inclusion rate of 66.7% and is carried back to reduce capital gains in 2023, the capital loss will be deducted at 50% (i.e., the 2023 inclusion rate).

It’s also a good time to review your estate plan to account for the proposed increase to the capital gains inclusion rate. When an individual dies, they are deemed to have disposed of all their property at fair market value. This deemed disposition can result in capital gains or capital losses if the deceased owned capital property. Therefore, the proposed increase in the capital gains inclusion rate may result in a higher tax liability on these deemed dispositions, so it’s essential to plan how this increased tax liability will be funded. 

The new alternative minimum tax (AMT) rules are effective starting in the 2024 tax year and could increase the tax liability for certain individuals and trusts. To assess the impact of these changes, reach out to your advisor to project your income for AMT purposes and evaluate whether there are any planning opportunities available to minimize your AMT liability.

Potential strategies include considering how rebalancing investment portfolios could reduce or recover your AMT. You could also consider transferring your portfolio to a corporation (as corporations aren’t subject to AMT); however, you should complete a cost-benefit analysis, as there are many other factors to consider. For example, you should consider the proposed increase to the capital gains inclusion rate. Remember that corporations can’t access the proposed $250,000 threshold available to individuals. Therefore, any capital gains realized by a corporation would be subject to a 66.7% inclusion rate if the proposed changes are enacted.

In addition, if you pay AMT, you have seven years to use this as a credit to offset your regular income tax liability or the AMT becomes a permanent tax. Therefore, if you are subject to AMT, or have paid AMT in the past, you should also project your regular income for tax purposes to determine if there are any opportunities to recover the AMT. Consult with your advisor to discuss potential options to generate taxable income, where beneficial (e.g., through RRSP withdrawals or triggering capital gains).

If you’re planning to sell or transfer your business soon, there are some new and proposed tax measures that could impact your succession plan.  

• Intergenerational business transfer rules – If you plan to sell your business to a family member, you may need to meet additional requirements for the intergenerational business transfer rules to apply. These rules were originally implemented to treat the transfer of certain shares to certain family members similarly to a third-party sale. The latest changes to these rules provide two options to transfer your business to the next generation: the immediate and gradual intergenerational business transfer. Each plan has specific conditions to qualify for the transfer to receive capital gains treatment. Reach out to your advisor for assistance with the many considerations, including the impact of the proposed increase in the capital gains inclusion rate.    
• Employee ownership trust – If you plan to make employees owners of your business, you may qualify for new tax benefits under the employee ownership trust (EOT) rules, available as of January 1, 2024. EOTs may provide a new succession planning opportunity to make it easier to transition your small business to your employees. Tax benefits include a temporary tax exemption on up to $10 million in capital gains realized on the sale to an EOT occurring in the 2024 to 2026 tax years, if certain conditions are met. If there are multiple owners that qualify, the $10 million exemption must be shared in an agreed-upon manner 
• Proposed Canadian Entrepreneurs’ Incentive – Where eligible, you could consider waiting for the new year to sell your business to potentially benefit from this proposed incentive. This measure would allow Canadian entrepreneurs in certain industries to benefit from a reduced capital gains inclusion rate of 33.3% (up to a certain limit) upon selling their business on or after January 1, 2025, if the conditions are met. If enacted, this reduced inclusion rate would apply to a limit of $400,000 in eligible capital gains in 2025. The limit would increase by $400,000 each year until it reaches a lifetime maximum of $2 million in 2029. This proposed incentive could also be used in conjunction with the lifetime capital gains exemption, where eligible.

Also keep in mind that the lifetime capital gains exemption is proposed to be increased to $1.25 million (from 1.02 million) retroactively for dispositions occurring on or after June 25, 2024.  

Review how you pay yourself or other family members to ensure you’re extracting funds from your business in the most tax-efficient way.

If possible, pay yourself a salary that’s large enough to maximize your CPP and RRSP contributions. Ensure that family members working for the business receive reasonable salaries, reflecting what you’d pay a non-family member for the same job. You should determine what the most effective mix of dividends and salaries is for you and your business while keeping in mind that:  

• A business can deduct a reasonable salary payment, whereas dividends are paid from after-tax profits.
• Dividends paid to a family member may be subject to the “tax on split income” (TOSI) rules and trigger tax at a higher marginal tax rate.
• Bonuses accrued must be paid within 180 days following the year-end to qualify for a deduction for the business.

If you’ve borrowed money from your business, you should ensure that the interest you’re charging yourself is reasonable. If the interest rate is below the prescribed rate set by the CRA, the differential might be treated as additional income for tax purposes.

You should also ensure you repay any shareholder loans within one year of the company’s tax year-end. If you don’t, you’ll need to report the full loan amount as income in the year it was received. For example, let’s say you borrow $10,000 from your company on June 1, 2024 and your business has a September 30 year-end. If the loan remains unpaid on September 30, 2025, you’ll have to report the $10,000 as income on your personal income tax return for the 2024 taxation year. Exceptions may be available for certain home, company stock, or car acquisitions where the loan is made because of your employment (and not as a shareholder) and is subject to a bona fide repayment arrangement within a reasonable term.

If the loan is forgiven, that amount will be included in your income in the year of forgiveness. Finally, as shareholder loans are assets for your business, it’s important to make sure these non-active business assets do not “taint” the Small Business Corporation or the Qualified Small Business Corporation status of your company.