Introduction

The 2024 Canadian Budget proposed significant changes to capital gains taxation, particularly affecting professional corporations. As professionals operating under corporate structures, it’s crucial to grasp the implications of these amendments and strategize accordingly. The changes break tax integration for Canadian Controlled Private Corporation (CCPC) which is highly problematic for owners of these corporations. The effective tax rate will rise by 1/3. 

In this article, we dive into into the proposed changes and offer practical advice to navigate the shifting tax treatment of professional corporations.

Understanding the Changes

One of the primary modifications introduced in the 2024 Budget impacts taxation of capital gains within professional corporations. Previously, professional corporations enjoyed certain advantages concerning the taxation of capital gains, but the new budget proposes changes that are suggested to “ensure fairness” in the tax system.

Under the new provisions, a higher tax rate is imposed on capital gains realized by professional corporations with an inclusion rate of 66.7%. Unlike for individuals, this revised capital gains inclusion will impact every single dollar of realized capital gains.  Individuals will only see the increased capitals gains rate if they exceed $250,000 of realized gains in a given tax year.  

Implications for Professional Corporations

 For professional corporations, this change will require a reassessment of existing investment strategies and financial/tax planning. The increased tax burden on capital gains could have significant implications for the overall profitability and tax efficiency of these entities.

As the legislation is confirmed and passed a law, professionals will need to collaborate closely with financial advisors and tax experts to optimize their corporate structures and mitigate tax liabilities effectively.

In light of the revised capital gains taxation, professional corporations can adopt several proactive measures to navigate the changes adeptly:

Review Investment Portfolio: Evaluate the composition of your corporation’s investment portfolio to identify assets susceptible to capital gains taxation. Consider diversification strategies and asset allocation techniques to minimize tax exposure while preserving investment growth.

Optimize Compensation Structure: Assess the balance between salary and dividends within your professional corporation to optimize tax efficiency. Adjusting compensation structures can help mitigate the impact of higher capital gains taxes on overall tax liabilities.

Consider Realizing Capitals Gains Before June 25, 2024: If you will have need of the funds in the short term, considering triggering capital gains prior to June 25 to avoid the excess tax. However, if you were otherwise going to flow the funds personally, it still may be worth deferral triggering capital gains. The Loonie Doctor offers a nice capital gains calculator to help you figure out the best courses of action.

Save Capital Losses: If you haven’t yet filed last year’s corporate tax return and were going to claim capital losses (and plan to claim capital gains soon after June 25, 2024), you may want to save those capital losses to carry forward to the future when they will offset more capital gains tax.

Save Capital Losses: Don’t miss out on existing tax advantages of professional corporations such as enhanced investment growth due to tax deferral, income splitting (where feasible), claiming reasonable business expenses, using a private health services plan to convert personal health expenses into corporae deductions, among others.  

Consider Building a Business That Qualifies the Entrepreneurs’ Incentive: For younger professionals using a corporation to grow their retirement funds, consider creating a second business that could be sold in the future, perhaps one that is adjacent to your area of expertise. For example, doctors might create a health business that has the capacity to be sold down the road). It is critical to be aware of those businesses that don’t qualify for the Entrepreneur’s Incentive such as professional corporations, financial, insurance, food and accommodation, arts, recreation, entertainment and personal care services firms. However, a business that qualifies will benefit from reduce capital gains on sale of the business – they will have access to the lifetime capital gains exemption of $1.25 million plus a 1/3 capital gains inclusion on (eventually) $2 million in additional capital gains. Once the Canadian Entrepreneurs’ Incentive is fully implemented, entrepreneurs will see at least $3.25 million in total and partial lifetime capital gains exemptions.

The capital gains changes introduced in the 2024 Canadian Budget herald a paradigm shift for professional corporations, necessitating a proactive approach to taxation and financial planning. By understanding the implications of these amendments and implementing strategic measures, professionals can navigate the evolving tax landscape effectively while optimizing their corporate structures for long-term success.