Make No Mistake, Budget 2024 Specifically Targets Real-Estate Investors

The Federal Government Brings Down the Hammer on Real-Estate and Corporate Investors

Budget 2024, tabled today by Finance Minister Freeland is, on the surface, a seeming patchwork of unrelated tax cuts, tax hikes and tax incentives.

Simmering underneath it all, though, is one clear message to Canadians:

Stop investing in real-estate and start investing in active small businesses.

Capital Gains Inclusion Rate Going up on June 25th 2024

The Big Stick

The first big stick the Federal Government used to beat back real-estate investing in Canada is by increasing the capital gains tax that real-estate investors will pay when the dispose of their properties.

This was done in two ways:

Targeting the size of the transactions:

Unlike selling shares of a company, which can be sold over multiple years, the Federal Government is aware that when you sell a property, you get all of the money all at once.

It is difficult to sell a property over multiple years, and in small chunks under $250,000.

It was likely for this reason that they decided to increase the capital gains inclusion rate for individuals to 66% only on gains over $250,000 in a single year.

By doing so, individual investors and entrepreneurs will be able to time their transaction to avoid this tax, whereas real-estate investors will not be able to strategize in the same manner.

This is a feature, not a bug.

2. Targeting Real-estate Corporations

The Federal Government also excluded Trusts and Corporations from the lower $250,000 capital gains “bracket” that was offered to individuals.

They did this in a very quiet, deliberate, way with the use of a single word:

Budget 2024 announces the government’s intention to increase the inclusion rate on capital gains realized annually above $250,000 by individuals and on all capital gains realized by corporations and trusts from one-half to two-thirds, by amending the Income Tax Act, effective June 25, 2024.
-Budget 2024

A 66.6% Capital Gains Inclusion Rate for Corporations and Trusts

That solitary “all” will have significant impacts to corporations that own real-estate and corporations that that own passive investments, generally.

It means they’ll now have to pay tax on 66.6% of their capital gain as if it was income, up from 50% previously.

Considering corporate tax rates hover in the mid-50 %s, this one hurts.

It could mean capital gains tax bills as high as 35% for corporations.

It is especially nasty for real-estate investment businesses because they often do not qualify for the lifetime capital gains exemption like active Canadian controlled businesses do.

It gets pretty complicated from here, but simply put, keeping your passive real-estate investments in a corporation will now have significant negative tax impacts that need to be considered.

0% Capital Gains Tax for Other Business Types

While they used the stick on real-estate investors, they were busy offering a carrot to other types of entrepreneurs:

Budget 2024 also adds:

An increase to the lifetime capital gains tax-free limit to $1.25 million effective June 25, 2024, and it will continue to be indexed to inflation thereafter. This incentive only applies to active Canadian business. (think businesses who employ people)

AND

A new Canadian Entrepreneurs’ Incentive which will reduce the inclusion rate to 33.3 per cent on a lifetime maximum of $2 million in eligible capital gains. Which of course, excludes sectors such as financial, insurance, real estate, food and accommodation, arts, recreation and entertainment, along with consulting or personal care services.

Combining these two new items means that many entrepreneurs will have a combined capital gain exemption/reduction of at least $3.25 million when selling all or part of a business.