How will Canada’s Capital Gains Increase Affects those with Investments?

The Canadian government’s plan to increase Canada’s capital gains inclusion rate, introduced in the 2024 Federal Budget, has caused growing concern from taxpayers as many consider selling cottages and investments before the new policy goes into effect on (or after) June 25 of this year.

While legislation has yet to be drafted, the inclusion rate increase would affect individuals with capital gains of over $250,000 for the year realized after June 24, 2024. For trusts and corporations, there will be no $250,000 exemption level.

Though the move was supposed to target high-income earners, many are criticizing the decision for affecting middle-class earners as well.

Here’s what you need to know before selling any assets.

Understanding the proposed changes

The government’s capital gains proposal would increase the percentage of capital gains included in income for tax purposes from 50% to 66.7% on capital gains. For individuals, capital gains under $250,000 for the calendar year would still be taxed at the original 50% inclusion rate.

For example, if you sold a cottage with a gain of $400,000, the first $250,000 would have a 50% inclusion rate, while the last $150,000 would have an increased inclusion rate of 66.7%.

This would effectively increase the income tax rate by several percentage points for capital gains realized on or after June 25, 2024 for all.

An Ontario resident individual in the top marginal tax bracket will see around an 8% or 9% increase in their income taxes for capital gains over $250,000 for the year.

Our take: Should you sell your investments?

Taxpayers are split about the government’s newest capital gains inclusion rate increase.

Realtors are seeing a boom of cottage owners rushing to sell and close existing deals before the government’s June 25, 2024 implementation date.

We are encouraging clients to avoid making any rash decisions and recommend speaking with your trusted Zeifmans advisor before selling any significant investments.

While it may be beneficial to sell some assets before June 25, like publicly traded stocks, bonds, or mutual funds, to avoid higher tax rates, other investments, such as private company shares or real estate, are harder to liquidate and these sales shouldn’t be rushed.

Before making any decisions, it’s important to understand the potential consequences that may affect those selling investments before the deadline, such as the alternative minimum tax and the new general anti-avoidance tax penalty. It’s also important to note that those selling residential property owned for less than a year may have their sale classified as business income, which is fully taxable.

How this change affects estate planning

Those in the estate planning process should take the capital gain increase into consideration as it will mean higher tax liability. It’s important to decide how your estate will offset these taxes. Some choose to self-finance any tax increases, while others adjust their life insurance policies.

It may also be useful to look into freezing your interest in private corporations, to reduce future growth to the first-generation business owner and bypass it to the next generation. This will lock in the shares’ present value, ensuring that you are mitigating the quantum of the future death consequences to the current business owner’s estate.

Navigating constantly evolving tax laws

While many are concerned about the capital gains increase, selling investments too quickly can result in unintended consequences. At Zeifmans, we have the experience and industry expertise to guide clients through changing tax rules.

For more information on the capital gains increase, please reach out to your trusted Zeifmans Advisor or connect with us below.

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