Impact of Federal Budget 2024 on the Technology, Media & Telecommunications Sector

The Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, delivered the 2024 federal budget (Budget 2024), Fairness for Every Generation, on April 16, 2024.

The following is an overview of key tax measures announced that can impact businesses in the technology, media and telecommunications (TMT) sector.

Capital gains inclusion rate

Budget 2024 proposes to increase the capital gains inclusion rate for capital gains realized on or after June 25, 2024, as follows:

• For corporations and trusts: from 50 percent to 66.67 percent
• For individuals: from 50 percent to 66.67 percent on the portion of capital gains realized in the year exceeding $250,000. The 50 percent inclusion rate will continue to apply to capital gains within the $250,000 threshold

The $250,000 threshold would effectively apply to capital gains realized by an individual, either directly or indirectly via a partnership or trust, net of any:

• current-year capital losses
• capital losses of other years applied to reduce current-year capital gains, and
• capital gains in respect of which the Lifetime Capital Gains Exemption (LCGE), the proposed Employee Ownership Trust exemption, or the proposed Canadian Entrepreneurs’ Incentive (see below) is claimed

Net capital losses of prior years would continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the capital gains being offset.

Claimants of the employee stock option deduction would be provided a one-third deduction of the taxable benefit to reflect the new capital gains inclusion rate. They would also be entitled to a deduction of 50 percent of the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains.

Two different inclusion rates would apply for tax years that begin before and end on or after June 25, 2024. It will be important to separately identify capital gains and losses realized before the effective date and those realized on or after.

Lifetime Capital Gains Exemption

Budget 2024 proposes to increase the amount of the LCGE to $1.25 million (currently $1,016,836 for 2024) of eligible capital gains. This measure would apply to dispositions occurring on or after June 25, 2024. Indexation of the LCGE to inflation would resume in 2026.

Canadian Entrepreneurs’ Incentive

Budget 2024 also introduces 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.

Conditions to be a qualifying share include:

• the claimant was a founding investor at the time the corporation was initially capitalized
• the claimant held the share for a minimum of five years before disposition and owned more than 10 percent of the votes and value of the corporation at all times, and
• the claimant was actively engaged on a regular, continuous, and substantial basis in the activities of the business.

Certain shares are not eligible for the incentive, including shares of a corporation:

• representing a direct/indirect interest in a professional corporation
• whose principal asset is the reputation or skill of its employees
• carrying on business in the financial, insurance, real estate, food and accommodation, arts, recreation, or entertainment sector; or
• providing consulting or personal care services

This incentive would provide for a capital gains inclusion rate at 50 percent of the prevailing inclusion rate on up to $2 million in capital gains per individual over their lifetime. Under the two-thirds capital gains inclusion rate proposed in Budget 2024, this measure would result in an inclusion rate of one-third for qualifying dispositions. This measure would apply in addition to any available capital gains exemption.

This measure would apply to dispositions occurring on or after January 1, 2025. The lifetime limit would be phased in by increments of $200,000 per year, beginning on January 1, 2025, before ultimately reaching a value of $2 million by January 1, 2034.

How will these changes impact the TMT sector?

The proposed changes may have a significant impact on investment behaviour and business decisions within the TMT sector.

Technology companies often rely heavily on equity financing to expand their business. If passed as currently proposed, the increase in the capital gains inclusion rate would result in higher tax liability for investors when they dispose of their shares and realize capital gains.

Investors may re-assess their investment strategies — for example, pivoting toward dividend-paying companies instead of high-risk, high-reward technology companies. As a result, technology companies may face challenges in raising capital through public offerings or private placements. This would make it harder for them to compete in the market.

Unlike other industries, entrepreneurs and founders often invest significant resources in developing new technology in hopes of realizing capital gains upon exit as a reward for their efforts. Although Budget 2024 proposes a Canadian Entrepreneurs’ Incentive to reduce the tax rate on capital gains realized on qualifying shares disposed of by founders, it only provides relief on up to $2 million in capital gains.

What’s next?

For more information on how the tax measures announced in Budget 2024 will impact the technology sector, contact a member of MNP’s Technology Media Telecommunications team.

The information contained in this document is current to May 7, 2024. It is important to note that no draft legislation has been released to date with respect to the measures mentioned above. The government was clear that additional design details about the capital gains are forthcoming, and they intend to make other consequential amendments to reflect the new inclusion rate.

Furthermore, any planning undertaken in respect of these measures should also consider the pending changes to other tax measures, such as the Alternative Minimum Tax and the General Anti-Avoidance Rule.