Understanding the Impact of Budget 2024 on CCPCs
With Budget 2024’s announcement, the capital gains inclusion rate is set to rise, affecting incorporated business owners and professionals with unrealized capital gains. The increase from 50% to two-thirds for capital gains inclusion, effective June 25, has sparked a need for strategic tax planning.
The complexity of this decision is amplified for assets within a corporation compared to those held personally. For example, a Canadian-controlled private corporation (CCPC) can use its capital dividend account (CDA) to distribute tax-free dividends to shareholders, which is a benefit not available on personal assets.
Before the June 25 change, a $1,000 capital gain in a CCPC would result in $710 after corporate and personal taxes at the highest rate. Post-change, the remaining amount drops to $614, highlighting the importance of considering whether to realize gains now or later.
However, the decision isn’t straightforward. Factors such as personal tax rates on dividends and the potential trapping of refundable taxes within the corporation due to low personal spending needs can influence whether to defer gains.
Moreover, realizing a large capital gain could affect the CCPC’s small business deduction (SBD) threshold, increasing future corporate taxes. Also, choosing dividends over salary could impact RRSP contributions and CPP benefits.
Advisors must consider these variables within the context of an overall financial plan. For some, realizing capital gains before June 25 and utilizing capital dividends to reduce future personal taxes may be advantageous.
Dr. Mark Soth, a voice in personal finance and co-host of the Money Scope podcast, emphasizes the opportunity for advisors to deliver value through informed guidance on this topic. A follow-up article will delve deeper into case studies that illustrate these strategies.
