Tax Tip Thursday

There’s lots of talk about the capital gains changes coming up thanks to Trudeau.

They are claiming it is to target the wealthy, but I would say that is not exclusively the case. There are a lot of people that are going to be affected by this who are not wealthy.

The Concept

The concept is pretty straightforward in principle, and they are determined to make sure it comes into effect June 25, 2024.

1. Individuals who have capital gains over $250k in a tax year will have an inclusion rate of 66.7% above $250k. It will remain at 50% below $250k.
2. Corporations will have an inclusion rate of 66.7% on ALL capital gains.

What Does That Mean?

There is definitely some confusion for people over what exactly that means.

Capital gains are the difference between the sale price and purchase price of investments or properties (excluding your principal residence) and some business assets. The most basic forms of transactions that would affect most people are stocks, mutual funds, cottages, and rental or investment properties.

The 50% and 67% are not tax rates. They are the amount of the capital gains that will be included in income. The tax rate will be based on your level of income and the associated tax rate. If you are in the top tax rate as a result of the capital gain, it is 53.53% in Ontario.

This means that before June 25, you would pay 53.53% tax on 50% of the capital gain, both as an individual and a corporation. This results in a net tax of 26.7% tax on the capital gain.

After June 25, you will pay 53.53% tax on 67% of the capital gain OVER $250k as an individual and all capital gains for a corporation. This results in a net tax of 35.7% tax on that portion of the capital gain.

The net impact for the portion of the capital gain that is affected is 9%.

Tax planning considerations

If you have any plans of selling an asset, that would be affected by the new rules, in the near future anyway, you may want to consider selling it (and closing) before June 25. This could be problematic if you are trying to sell real estate though.

If you are very elderly and/or in poor health and are planning to leave significant amounts of money to your family, you may want to consider divesting before June 25. While you will incur a significant tax bill at this time, you can potentially save up to 9% and you can then gift the money to your family tax-free.

If you have family cottages that are expected to continue to be family cottages for many years to come, there is probably no action required.

If you are planning to hold your assets for more than 5 or 6 years, you may not want to take action at this time either, as you will be effectively prepaying your taxes and there is a time value of money.

You may have capital losses from previous years that you can utilize and as well you may consider utilizing tax loss selling prior to June 25 to also help you stay under the $250k

Another consideration is that you could trigger an Alternative Minimum Tax (AMT), which occurs when your income is excessively high, without the matching tax. The AMT is recoverable over 7 years in the future, but it would cost you the tax up front now in the year of disposition.

Other possible outcomes and considerations

The government may retreat from this proposal, either wholly or partially, for example:

• exempting “personal-use property” such as cottages (already subject to special treatment as capital losses on such property are not recognized), perhaps up to a specified dollar limit
• extending the $250,000 annual 50 percent inclusion rate allowance to all taxpayers, not just natural persons, to take most small corporations out of scope; or
• expanding the scope of relieving provisions directed at entrepreneurs such as the seldom used eligible small business corporation rollover, to facilitate reinvestment of profits in high-risk start-up ventures.

The liberals may not be in power soon and the new government could reverse it as quickly as it was put into place, possibly negating any possible impact. Anyone realizing a gain in 2024 and effectively pre-paying their tax may regret doing so if 2025 ends with the capital gains inclusion rate going back to 50 percent.

Any of these items would have a significant impact on the outcome of this tax.

How Can I Prepare?

Every situation will be different, so you should do your research and seek out advice on your move forward position. And you better do it quickly! This takes effect soon! Book your appointment with us today.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.