Changes are being added for the 2024 tax year, intended to mainly affect higher incomes, but risk spilling over into this wave of business sales expected to break out. Among them, the federal government is revisiting the minimum tax, and it is expected that Quebec will echo this and reiterate, in its March 12 budget, its commitment to harmonize. We are talking about more than cosmetic changes, which require tighter tax planning.
Let’s first return to the changes expected for 2024. For the moment, the main ones relate to the indexation rate of the personal income tax system, which is 5.08% in Quebec and 4.7% at the federal level. For higher incomes, savers with a taxable income in Quebec of more than $112,655 in 2022 should no longer benefit from the 30% tax credits relating to a workers’ fund. The application of this measure is postponed until 2027.
But a major change, the calculation of the alternative minimum tax (AMT) is significantly modified, with the aim of better targeting high-income taxpayers (and trusts). Simply summarized, this tax aims to reduce the proportion of taxpayers using certain tax advantages allowing them to pay little or no tax.
Thus, at the federal level, it is planned that the AMT rate will be increased from 15% to 20.5% and the basic exemption will increase from $40,000 to approximately $173,200. So, fewer taxpayers affected, but a higher tax bill. Furthermore, the taxable income base used for the calculation will be broadened, we read in the documentation from Raymond Chabot Grant Thornton (RCGT). “These changes will have an impact for high-income taxpayers, particularly for individuals (and trusts) who realize a significant capital gain, particularly a capital gain not eligible for the capital gains deduction,” summarizes the firm. accountants. The Parliamentary Budget Officer estimated that at the federal level alone, these changes will generate additional tax revenues of $2.6 billion over five years.
In addition to these parameters, Vincent Fortier, senior director of taxation at RCGT, points to the changes made to the inclusion rate of certain capital gains in the calculation of the AMT, which is now set at 100% compared to 80% previously. , and the adjustment of the tax credits and the basic amount, reduced to 50% of the credit applicable for AMT purposes.
Risk of overflow?
Examples ? RCGT gives that of an individual who receives a salary of $150,000 and dividends of $100,000, who realizes a capital gain of 3 million on which he claims a capital gains deduction of $971,000. He would not have had any AMT to pay in 2023, but he would have to pay a little more than $100,000 this year under the new parameters. Also, an entrepreneur who sells his shares at the end of his career could find himself with a significant IMR to pay, without the possibility of recovering it if he does not have other sources of income after retirement, such as a salary or withdrawals. RRSP.
RCGT gives other examples. Since only 50% of non-refundable tax credits, including the charitable donation tax credit, will now reduce AMT, these changes will affect taxpayers who make large donations. Also, individuals who will have a significant taxable benefit in connection with the exercise of stock options could be affected, since such an advantage will now be considered 100% (compared to 80% previously) for tax purposes. ‘IMR.
Small business spared?
In all of this, it should be noted that the changes made to the inclusion rate of the portion of the eligible capital gain do not affect the shares of small businesses. So, “I don’t think there will be an impact on the business transfer. Ultimately, in certain cases we could talk about favorable changes, or even imagine a reduction in the tax bill,” underlines Vincent Fortier. The specialist, however, brings some caveats. First, the sale of shares not eligible for the capital gains deduction, particularly the gift of shares listed on a stock exchange, is at a disadvantage. Also, the mechanism provides for a recovery period of seven years if during a subsequent year the current tax is higher than the AMT paid. This recovery is now likely to be more difficult, he says.
Quebec will harmonize with these measures, with its own rate and exemption parameters. In his information bulletins, the Minister of Finance emphasizes that Quebec intends to establish parameters similar to those proposed by the federal government, according to Quebec’s particularities. It is expected that it will increase the IMR rate from 15% to 19%. And that the AMT exemption will increase from the current eligible amount of $40,000 to $175,000 in 2024, to be indexed from 2025.
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Last May, according to the Quebec entrepreneurial index unveiled by Réseau Mentorat and its partners, we could read that six out of ten owners plan to sell or transfer their business over the next ten years. However, nearly seven in ten owners aged 50 to 64 “will retire or get out of business in ten years or less, generating a veritable wave of businesses available for transfer,” it has already been written.