The federal government delivered its budget April 16, and it contained two very important changes that could affect long-term planning for your operation.
These changes are extremely important to note for agricultural producers because they will likely impact future tax payable amounts. They are the increase in the capital gains inclusion rate to two-thirds from 50 per cent and the increase in the capital gains deduction amount for qualifying farm property to $1,250,000 from $1 million.
At the time of writing this article, legislation had not been released and passed implementing the budget proposals, so the actual rules put into the Income Tax Act may vary from what has been announced. The focus of this article will be on the capital gains inclusion rate.
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What does this mean?
This change means that if your operation is incorporated, 66.67 per cent of your capital gain will be taxed instead of one-half. If you operate as a sole proprietor, this increase will only affect the portion of capital gains that exceeds $250,000.
As a result, if you realize capital gains that are less than $250,000, you will still include only 50 per cent of the capital gain in income. The new rule will be in effect for any capital gains realized on or after June 25, 2024.
This change can be significant to those who are in the agriculture industry because there can be adverse tax effects when selling assets.
For example, if you sell an asset and realize a capital gain of $100,000, you would have previously been taxed on $50,000. Assuming that you are a corporation or an individual who is already over the $250,000 threshold, under the new rules you will instead be taxed on $66,667. Therefore, $16,667 will be added to your taxable income.
This can have a significant impact on the amount of tax you may owe and is important to keep in mind when purchasing and selling assets, as well as with succession planning.
Many farming operations are contemplating succession planning, and this new rule will now have implications that may not have been factored into the original plans. Items that you may want to revisit include:
- Paying higher tax on your capital gains ultimately means that you have less after-tax proceeds. You may want to re-evaluate how this will affect your cash flow for retirement.
- You may want to adjust the timing of transferring assets to mitigate the effects of the new inclusion rate. If you own the assets personally, you may want to transfer them over a few years in order to stay under the $250,000 threshold and avoid the higher inclusion rate.
- If you are using estate planning strategies. the new inclusion rate could have an impact on how effective these tools may be. Some tools that you may be using would be trusts, gifting or rollovers. It is important to discuss this with your accountant to determine how it may affect your succession plan and if any adjustments need to be made.
Paying higher tax on your capital gains ultimately means that you have less after-tax proceeds. You may want to re-evaluate how this will affect your cash flow for retirement.
You may want to adjust the timing of transferring assets to mitigate the effects of the new inclusion rate. If you own the assets personally, you may want to transfer them over a few years in order to stay under the $250,000 threshold and avoid the higher inclusion rate.
If you are using estate planning strategies. the new inclusion rate could have an impact on how effective these tools may be. Some tools that you may be using would be trusts, gifting or rollovers. It is important to discuss this with your accountant to determine how it may affect your succession plan and if any adjustments need to be made.
It is important to understand this change and how it may affect your operation today and into the future. This will be an important topic of discussion between you and your trusted advisers to ensure that you are navigating this in a way that best suits your operation.
Stay tuned for our next article, which will focus on the increase in the capital gains deduction.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca.
