2024 Federal Budget: Impact on Valuations

Recently, there has been considerable buzz about the changes announced alongside the 2024 Federal Budget on April 16^th, particularly the increase in the capital gains inclusion rate. In this blog, we will discuss these changes and their impacts within the world of valuations.

1. Capital Gains Inclusion Rate

For more than two decades, the capital gains inclusion rate has been 50%. However, as of June 25, 2024, the capital gains inclusion rate for individuals, corporations, and trusts was increased to 66.67%. To alleviate the impact on taxpayers, the first $250,000 of capital gains per year for individuals will be subject to the original 50% inclusion rate.

From a valuation perspective, the increased inclusion rate may decrease the fair market value of a business valued through an asset-based approach if there are contingent capital gains taxes. It will also increase personal contingent taxes associated with a share sale (in the context of a family law matter).

2. Lifetime Capital Gains Exemption

Before the changes were in effect, individuals were eligible to offset capital gains up to $1,016,836 on qualified property, which has increased over the years with inflation. Effective June 25, 2024, the lifetime capital gains exemption will increase to $1,250,000 and be indexed for inflation commencing in 2026.

Similar to the capital gains inclusion rate, the change to the lifetime capital gains exemption will impact the amount of personal contingent income taxes associated with a share sale for an individual.

3. Canadian Entrepreneurs’ Incentive

Starting on January 1, 2025, individuals will incur a reduced inclusion rate of 33.33% on capital gains from qualified property that is not offset by the lifetime capital gains exemption. The lifetime limit will commence at $200,000 in 2025 and increase annually by same until it reaches $2 million in 2034.

In order to be eligible for the incentive, the same requirements as the lifetime capital gains exemption must be satisfied, as well as the following additional qualifications:

• Shares owned by the taxpayer
• Taxpayer involved and held shares during the 5 preceding years
• Taxpayer did not hold less than 10% of votes and fair market value since share subscription
• Taxpayer was a founding investor at time the corporation was capitalized

In addition to these requirements, shares of businesses operating in the following industries are excluded from the incentive:

• Financial and insurance
• Art, recreation, and entertainment
• Professional corporations
• Real estate, food, and accommodation
• Consulting or personal care services

When calculating contingent taxes associated with a share sale, valuators may consider whether the seller will be eligible for the Canadian Entrepreneurs’ Incentive and what the lifetime limit will be at the time of the sale.

4. Employee Stock Options

Before the changes were in effect, qualifying employee stock options were eligible for a 50% deduction for tax purposes. Effective June 25, 2024, the deduction will decrease to 33.33%, creating a 66.67% taxable portion. However, similar to the capital gains inclusion change, there will be an exemption where the first $250,000 is taxed at 50%.

This will be important to consider when calculating the net value of employee stock options in a matrimonial dispute. More information about employee stock options can be found on our blog – 3 Things You Need to Know When Valuing Employee Stock Options.

The 2024 Canadian Federal Budget introduces changes that will impact various aspects of valuation, particularly regarding capital gains inclusion rates, lifetime capital gains exemptions, and incentives for Canadian entrepreneurs. These changes highlight the importance of staying informed and adapting valuation practices to align with the new tax landscape. Whether you are dealing with share sales or employee stock options, understanding these updates is crucial in understanding how the value of your business, net of any personal taxes is impacted.

If you have further questions about how the 2024 Federal Budget will impact the value of your business, give the professionals at Davis Martindale a call!

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