Summary
How the Recent Budget Proposal’s Capital Gains Tax Increase Affects Middle Class and Wealthy Canadians
The recent release of the Canadian federal budget has stirred up quite a bit of conversation among Canadians, particularly concerning how it affects individuals, corporations, and trusts with significant capital gains. Here’s a comprehensive analysis of the key changes and what they might mean for you.
Increased Capital Gains Tax
Starting from June 25, 2024, the budget introduces a substantial tax increase for capital gains exceeding $250,000. The new tax rate will be 66.7%, up from the current 50%. This change applies equally to individuals, corporations, and trusts, meaning that any capital gains beyond this threshold will be taxed at this higher rate.
Who Will Be Affected?
- High-Income Individuals: Those with substantial non-registered, non-sheltered savings could be significantly impacted. If your investments or real estate sales push your capital gains over $250,000, you’ll be hit with this new tax rate.
- Corporations and Trusts: The increase is particularly relevant for corporations and trusts, which will now face higher taxes on the first dollar they earn on gains.
- At the Time of Death: The budget also affetcts Canadian capital assets, which are considered sold at death, potentially causing a significant tax burden if the deceased’s portfolio exceeded the $250,000 mark.
Potential Strategies to Mitigate Impact
- Gradual Asset Sale: Selling off assets over several years could help keep annual capital gains below the threshold.
- Life Insurance: Using life insurance policies might offer a cost-effective way to cover potential tax liabilities on death.
- Charitable Donations: Donating to charity could be an alternative to reduce the tax burden while supporting causes you care about.
- Increase in Lifetime Capital Gains Exemption: The budget raises the lifetime capital gains exemption from approximately $1 million to $1.25 million, offering some relief for business sales.
Need for Careful Planning
The new tax changes underscore the importance of strategic financial planning. Whether it’s revisiting your financial plan, consulting with advisors, or considering new investment structures, staying informed and proactive is crucial.
Conclusion
While the budget’s increased capital gains tax may seem daunting, effective planning can mitigate its impact. For those concerned about these changes, consulting with a financial advisor to explore all available options is advisable. As always, staying informed and prepared is the best strategy in navigating through these financial changes.
Full Transcript
Hi everyone, so the Canadian federal budget has just been released, and already there’s been a lot of talk about starting conversations with clients and potential clients. So what I’m going to do is take a few minutes today to talk about that and how it affects everyday Canadians. Quite frankly, many people look at it and say, “Well, based on what I’m seeing here from the numbers, it doesn’t affect me,” but you have to consider that potential as well. So let’s jump into this. Okay.
Based on the budget that just came out, starting June 25th, 2024, this year, corporations, trusts, and individuals with capital gains exceeding $250,000 could be taxed at 66.7%. That’s an increase from the current rate of 50%. Now, it’s important to note that individuals with capital gains exceeding $250,000 will be taxed at 66.7%. But for corporations and trusts, starting June 25th, for every dollar of capital gains, you’re going to be taxed at that new rate, right? So I know there has been some confusion around that. In the big scheme of things, it’s quite significant. Now, some people might look at this and go, “Well, I’m a regular T4 person, I work, I get my paycheck, you know, $250,000. Well, that probably will not affect me.” And it may or may not; we’ll dive into that a little bit more. Now, if you’ve been saving and you have non-reg accounts, you know, non-registered, non-sheltered accounts that exceed $250,000, then potentially you could get hit with a spill. And you might say, “Well, when am I ever going to take out that amount?” And it’s quite unlikely, depending on your circumstances. But if you’re forced to sell for any reason, you will get hit with this amount, right? That’s something to consider. Now, you may say, “Well, you know, it probably doesn’t affect me.” Here’s another thing you have to consider.
If you’re selling investment properties, and as I mentioned, large portions of your retirement portfolios, that’s the potential there to push you over that $250,000 threshold. So if you have real estate, there’s a potential situation there where it will be affected. But here’s where a lot of people may get caught in this. At death, all Canadian investments are considered sold. It’s considered a disposition, in fact, it’s considered a disposition just before death. And if you have an asset that has a built-in capital gain at that point, it’s considered a disposition. So it’s as if you sold that property. Now, if you’re married, it will pass on; the assets will pass to your spouse. And so you only get taxed on the death of the last spouse if you so elect. And so you have some potential room there. But on the death of the last spouse, it’s considered a disposition. And if it’s a disposition, at that point, you may exceed the threshold.
So you may have a large portfolio and over time you have not exceeded this amount, but on the death of the last spouse, if your portfolio is over $250,000, you will get caught by this. If you are someone who invests in real estate, especially if you’re in the GTA area or certain areas of Vancouver or different parts of Canada, where you have a portfolio that exceeds this threshold, then you will also get caught in that. Now let’s spend a little bit of time on corporations. And this is where I think just the everyday working individual who may not be significantly wealthy is going to get caught by this. There’s an increase in capital gains tax for people who have corporations for every dollar. And so what this may do is push individuals who normally, you know, or maybe you’re considering investing in a corporation to say, “You know what, I’ll probably do that as an individual.” And at that point in a lot of circumstances, what you may be faced with is more exposure in terms of risk because one of the reasons why people invest in a corporation is to have that protection, that asset protection that comes with being a corporation. But they may have to weigh that with the fact that you have potential higher taxes, right? Now, there is some, you know, a bit of help from the government here in that the lifetime capital gains exemption, which was a million before, roughly a million, has now increased to $1.25 million. So if you’re planning on selling your business, you essentially would not have to pay taxes on the first $1.25 million in capital gains. So there is a bit of help there, but nonetheless, on a day-to-day basis, the increase in capital gains as a corporation or trust is something that could have a significant impact. So what are some of the solutions? And again, this is all new. We’ll wait to see if this really stays or not. And we’re still all new at this. We’re trying to figure this out. But here are some solutions that we have, right?
You could gradually sell assets over several years to keep annual capital gains below $250,000. So if you know that you’re going to exceed that threshold, and if you can, you could be strategic in how you sell off those assets over the years, right? So you don’t just do it all at once, you spread it out. You could also use life insurance if you have a huge potential tax liability on death. You could have life insurance. In some cases, it’s more cost-effective than paying out those taxes directly. Charitable donations are also an alternative at death instead of giving money to the CRA.
Some people say, “Well, I’d rather opt to give that to charity.” So there may be opportunities for charitable donations here to offset those tax bills. One question that may come up is, “OK, should I sell before June 25?” Be very careful about that. In fact, I strongly, strongly, strongly recommend you speak with your financial planner, advisor, accountant, whoever you are working with if that is going to be your route.
Just think it over before you just be impulsive and sell your assets in order not to have this tax bill. Because if you do that, you’re going to have a potentially significant tax bill which may or may not work in your best interest. So I strongly recommend that you take the time to do this. Another solution, quite frankly, that’s not listed here is get a financial plan. Look at your overall assets and see what’s the most tax-efficient way to do that. No, you may be working with a planner before, great. Then what you want to do is revisit this plan, especially if you know that you have investment property, if you have corporations, and if you have a significant amount of assets in non-reg. See if there are things that you could do to be strategic and to be tax efficient. So hopefully, this was helpful.
Again, as part of retirement, I have a book called “Art of Retirement,” and there’s a whole section there on tax minimization. So there are opportunities here, a lot, not a lot, but there’s a part that does talk about saving on capital gains. And hopefully, this has brought you some information that will be helpful. Again, this is all very new and this is proposed at this point. Let’s see if it sticks or not. But as I had said in a previous interview before sometime last year that,
It’s inevitable that there’s going to be an increase in tax. And I even proposed that potentially they’re going to increase capital gains tax. And here we are. So again, I strongly recommend that you meet with your advisor or your planner just to make sure that you’re doing the right thing. Hopefully, this was helpful. If you need to reach out to me, my contact is in the section below. Reach out, talk to you soon. Take care. See you next week.
