The federal government has set a deadline of June 24th, 2024, for Canadians to organize their capital gains planning in response to the 2024 federal budget. This budget has introduced a significant change to the capital gains inclusion rate, increasing it from 50% to 66.67%. This adjustment will have a broad impact, affecting corporations, trusts, and individuals.
Understanding Capital Gains:
Capital gains are the profits realized when selling an asset, like a cottage, investment property, stock, or mutual fund, for more than its original purchase price. For example, if you bought a cottage for $750,000 and sold it for $850,000, your capital gain would be $100,000.
Current Taxation:
At present, only half of the capital gains are taxable. So, if your asset sale results in a $100,000 gain, the taxable amount would be $50,000.
Proposed Changes: The 2024 federal budget proposes the following changes to capital gains taxation:
Inclusion Rate Increase:
For individuals with gains exceeding $250,000, the taxable portion of capital gains will increase from 50% to 66.67%. This means two-thirds of the gain above $250,00 will be taxable.
For gains below $250,000, the inclusion rate remains at 50%.
Corporations:
All capital gains for corporations will be subject to a 66.67% inclusion rate, with no $250,00 threshold.
The effective federal tax rate on capital gains for corporations will rise from 19.33% to 25.78%, starting June 25, 2024.
Shareholders must reassess the viability of holding capital assets in a corporation under these new rules. Post-realization of capital gain, reinvesting in corporate-owned insurance could be a strategic tax move.
Capital Dividend Account (CDA) Adjustments:
The CDA allows corporations to distribute the non-taxable portion of capital gains to shareholders as tax-free dividends.
With the new changes, only 33.33% of capital gains will be added to the CDA, reducing the tax-free capital available to shareholders.
Final Thoughts: Pause Before You Act - The instinct may be to act swiftly, but we advise a moment of reflection. Making irreversible changes without a strategic plan can lead to adverse financial outcomes. Our comprehensive analysis can identify the break-even point where the tax impact meets your investment objectives. This insight is vital for making informed decisions about the timing and manner of triggering taxable events.
Please feel free to reach out if you’d like to chat about your situation.
John Beal, CFP, CIM, FCSI
Portfolio Manager and Wealth Advisor
3 Keys Wealth, Raymond James Ltd.
647-837-5930
This communication has been prepared by John Beal, CFP, CIM, FCSI. Statistics and factual data and other information in this communication are from sources Raymond James (RJL) believes to be reliable but their accuracy cannot be guaranteed. This communication is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. RJL and its officers, directors, employees and their families may from time to time invest in the securities discussed in this communication. This communication is intended for distribution only in those jurisdictions where RJL is registered as a dealer in securities. Any distribution or dissemination of this communication in any other jurisdiction is strictly prohibited. This communication is not intended for nor should it be distributed to any person residing in the USA. RJL is a member of the Canadian Investor Protection Fund.
Comments