How will the 2024 federal budget impact professionals?

Corporate investment portfolio (retirement savings in the form of stocks, bonds, etc.)

Consider a doctor who resides in B.C. and has been saving and investing in their professional corporation for many years because they do not have a pension plan. This doctor is subject to the highest marginal tax rate and the professional corporation currently has an unrealized capital gain of $100,000.  

If the doctor’s professional corporation sells the investment and incurs a capital gain before June 25, 2024 — and pays a tax-free capital dividend and taxable dividend to the doctor — they would have $70,440 of after-tax personal dollars.

If the doctor’s professional corporation realizes the $100,000 capital gain on or after June 25, 2024, and pays a tax-free capital dividend and taxable dividend to the doctor, they would have $60,691 of after-tax personal dollars to spend.   

The after-tax dollar difference is significant at the personal level. A doctor requiring $70,440 to meet their personal needs would need to draw an additional $21,000 from their professional corporation to meet this shortfall. They would have to draw this amount via a salary or a $20,000 non-eligible dividend to meet the personal cash shortfall of $9,749 ($70,440 less $60,691).  

In short, if a capital gain was realized and the amounts were distributed via a tax-free capital dividend and a taxable dividend, the doctor would have to remove approximately $121,000 (including a bonus) on or after June 25, 2024, from the professional corporation to meet the after-tax targeted amount of $70,440.

In contrast, the doctor would only need to withdraw $100,000 from the professional corporation if the current capital gains inclusion rate of 50 percent was the relevant rate when the capital gain was realized, and the dividends were paid. 

Notably, a $100,000 capital gain would result in the doctor’s professional corporation having to recognize $50,000 of adjusted aggregate investment income (AAII). The same gain realized on or after June 25, 2024, would require the professional corporation to recognize $66,667 of AAII.

AAII is significant because each dollar of AAII that exceeds $50,000 reduces the doctor’s ability to utilize the small business tax rate (11 percent in B.C.). Instead, it requires a corporation to pay taxes at 27 percent, which may diminish a corporation’s ability to defer taxes on future earnings.  

Real property

Real property owned by a corporation (in B.C.) would be subject to the same tax results as an investment portfolio as it relates to a capital gain. For example, the following table outlines the tax difference if real property was sold with a $1 million capital gain before, versus on or after June 25, 2024.  

For simplicity, the table above does not consider capital cost allowance (tax depreciation) and assumes the highest marginal tax bracket.

A capital gain of $1 million realized in a corporation holding a building will result in $97,489 of additional tax on or after June 25, 2024.

Private company shares and personal property

The sale of private company shares is more relevant in certain professions when compared to others. For example, a dentist, optometrist and veterinarian often sell the shares of their professional corporation when a practice is sold. For physicians, this is seldom the case as the market generally does not exist for buying and selling medical practices.

When an individual sells shares on or after June 25, 2024, the inclusion rate will be 66.67 percent. However, unlike a corporation, an individual will have access to an annual $250,000 threshold which allows the individual to include the first $250,000 of the capital gain in their income at a rate of 50 percent and not 66.67 percent.

Lifetime Capital Gains Exemption  

Budget 2024 announced an increase to LCGE to $1.25 million (from $1.016 million) of eligible capital gains. This measure would apply to dispositions that occur on or after June 25, 2024 and is welcome news for professionals that have a market in which they can sell their private corporation shares.

The LCGE is available only to individuals who sell shares of a qualified small business corporation (QSBC). In addition to the enhanced exemption of $1.25 million, an individual can also benefit from the $250,000 capital gains inclusion rate threshold. In most provinces, before considering AMT, the increased exemption (fully utilized) will translate into approximately $423,500 of tax savings when compared to paying taxes at the highest marginal rates assuming the $250,000 threshold applies.

Alternative Minimum Tax

The 2023 federal budget introduced amendments to significantly change the AMT calculation. AMT is calculated in parallel with an individual’s regular income tax liability. However, it allows for fewer tax credits, deductions, and exemptions when compared to the ordinary personal income tax rules. Taxpayers pay the higher of the ordinary tax or the AMT liability. 

Canadian Entrepreneurs’ Incentive

Budget 2024 introduced the Canadian Entrepreneurs’ Incentive to reduce the tax rate on capital gains resulting from the disposition of qualifying shares of a corporation by an eligible individual.  

This new tax initiative allows a one-third capital gains inclusion rate on up to $2 million of capital gains. However, this program does not begin until 2025 and it will be phased in at a rate of $200,000 per year.

Specific conditions apply, including that the claimant was a founding investor at the time the corporation was initially capitalized. The assets of the business will also have to pass certain tests.

Employee Ownership Trusts

In 2023, the federal government introduced tax rules to facilitate the creation of EOTs. It is to shield the first $10 million in capital gains realized by an individual on the sale of shares to an EOT from taxation, subject to certain conditions. Budget 2024 provided further insights into this proposal.