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What the 2024 capital gains inclusion rate change means for Ontario doctors

What the 2024 capital gains inclusion rate change means for Ontario doctors

Synopsis
4 Minute Read

Discover how the 2024 federal budget's capital gains inclusion rate increase will affect Ontario doctors.

This article breaks down the new rules, the impact on professional corporations, and crucial transition guidelines for gains realized before and after June 25, 2024. Stay informed on how these changes may impact your tax obligations and financial planning.

Read on to learn more and see examples illustrating the financial effects.

Partner, Taxation Services
Partner, Taxation Services

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

This article will provide background on the increase in the capital gains inclusion rate from 50 percent to 66.67 percent and how it will impact Ontario doctors.

The government announced that updated draft legislation will be forthcoming. The full implications of this announced rule change will not be known until legislation is finalized and passed into law.

Capital gains inclusion rate

The capital gains inclusion rate has increased from 50 percent to 66.67 percent for corporations and most types of trusts for capital gains realized on or after June 25, 2024.

Additionally, for individuals and select types of trusts, the inclusion rate also rose from 50 percent to 66.67 percent on the portion of capital gains exceeding a $250,000 threshold realized in a year.

Capital gains realized by corporations

Ontario doctors that realize a capital gain in their professional corporation will pay approximately 9.65 percent more income tax on capital gains realized on or after June 25, 2024.

Consider the following example: Dr. A wholly owns shares of A Professional Corporation (APC). APC sells a marketable security and incurs a capital gain of $100,000. Dr. A will pay an extra combined personal and corporate income tax of $9,655 for selling the marketable security on or after June 25, 2024, compared to if the marketable security was sold prior to this date. This is because APC will pay more corporate income tax with the higher capital gains inclusion rate, leaving less cash available to pay as dividends to Dr. A.

Also, APC cannot pay as high of a tax-free capital dividend to Dr. A with the increased capital gains inclusion rate. In addition, Dr. A will pay more personal income tax because a higher taxable dividend will need to be paid from APC to extract all of the marketable security sale proceeds after corporate income tax has been paid. This is illustrated as follows:

  Pre-June 25, 2024  June 25, 2024
+ Onwards
Capital Gain Realized by Corporation $100,000 $100,000
 Inclusion rate 50.00% 66.67%
 Taxable Capital Gain 50,000 66,667
 Corporate Income Tax  (9,750)   (13,000)
 After-tax funds available  90,250  87,000
 Tax-free Capital dividend  50,000  33,333
 Taxable dividend   40,250  53,667
 Personal Income Tax  (19,215)   (25,620)
 Personal after-tax funds received   71,035  61,380
 Effective Income Tax Rate  28.97%   38.62%
 Net Tax Cost     9,655

Capital gains realized by individuals: Under $250,000

The first $250,000 of capital gains realized by an individual in a particular year will remain taxable at a 50 percent inclusion rate. Ontario doctors will therefore pay the same income tax when realizing a capital gain on or after June 25, 2024 than they would have paid if they realized a capital gain before June 25, 2024 if the total capital gains realized in a particular year is less than $250,000.

This is illustrated as follows:

  Pre-June 25, 2024  June 25, 2024
+ Onwards
Capital Gain Realized by Individual $1,000,000  $1,000,000
Inclusion rate on first $250,000 50.00% 50.00%
Inclusion Rate on >$250,000  50.00%  66.67%
Taxable Capital Gain  50,000  50,000
Personal Income Tax  (26,765)  (26,765)
Personal after-tax funds received  73,250  73,235
 Effective Income Tax Rate  26.77%  26.77%
 Net Tax Cost    0

Capital gains realized by individuals: More than $250,000

Ontario doctors that realize total capital gains of greater than $250,000 in a particular year will pay additional personal income tax on or after June 25, 2024, compared to if they realized capital gains prior to this date. The amount of income tax paid will depend on the total amount of capital gains incurred in a particular year because the first $250,000 of capital gains are subject to the 50 percent inclusion rate whereas the capital gains beyond $250,000 are subject to the 66.7 percent inclusion rate.

Consider the following example: Dr. Z personally owns the property in which they operate their medical practice. Dr. Z sells the property and incurs a capital gain of $1,000,000. Dr. Z will pay additional personal income tax of $66,912 for selling the property on or after June 25, 2024, compared to if the property was sold prior to this date. This is because the first $250,000 of capital gain will be taxed with an inclusion rate of 50 percent, whereas the remaining capital gain will be taxed with an inclusion rate of 66.67 percent.

This is illustrated as follows:


Pre-June 25, 2024 June 25, 2024
+ Onwards
Capital Gain Realized by Individual  $1,000,000  $1,000,000
Inclusion rate on first $250,000  50.00%
 50.00%
Inclusion Rate on >$250,000  50.00%  50.00%
Taxable Capital Gain  500,000  625,000
Personal Income Tax  (267,650)  (334,562)
Personal after-tax funds received  732,350  665,438
Effective Income Tax Rate  26.77%  33.46%
Net Tax Cost    66,912

The nuances of draft legislation

The $250,000 threshold for the 50 percent capital gains inclusion rate will apply to capital gains realized by an individual (not a corporation) in a year, either directly or indirectly via a partnership or trust, net of any current year capital losses. 

The $250,000 threshold will also factor tax deductions taken for capital losses from other years applied to reduce capital gains in the current year, the Lifetime Capital Gains Exemption, the employee ownership trust exemption and the Canadian Entrepreneurs’ Incentive exemption. 

The $250,000 threshold for the 50 percent capital gains inclusion rate does not apply to income earned by a trust unless the trust is a graduated rate estate trust or a qualified disability trust. 

Recent changes to the Alternative Minimum Tax will also need to be considered when determining the amount of income tax payable by an individual that incurs a capital gain after June 25, 2024. 

There are transition rules effective when capital gains are realized in 2024 whereas capital gains will need to be identified as being incurred before June 25, 2024 (Period 1) or being incurred on or after June 25, 2024 (Period 2) so that the applicable inclusion rate can be applied. 

Lastly, taxpayers that incurred a capital gain in a prior year and were able to pay the income tax in future years (referred to as claiming a reserve), including 2024, because they were not paid in full at the time of sale need to review whether the 66.67 percent inclusion rate will apply going forward.

Contact us

To learn more about how these changes will impact you and your practice, reach out today.

Michael Saxe CPA, CA, TEP, LL.M

Partner, Taxation Services

647-943-4120

1-877-251-2922

[email protected]

Nicholas Talarico CPA, CA

Partner, Taxation Services

780-733-8602

1-800-661-7778

[email protected]

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