Originally Published in Law360 Canada
In its 2024 budget, the federal government proposed to increase the capital gains inclusion rate from one-half to two-thirds for corporations, trusts, and individuals with annual capital gains in excess of $250,000. This caught a lot of people off guard, and now Canadians are scrambling for financial advice on the best way to handle this.
The capital gains tax hike is scheduled to take effect on June 25, 2024. What should Canadians do to prepare in this limited time frame?
The changes will primarily affect those who own assets that accrue capital value outside of registered savings plans. This includes people holding investment properties, stock portfolios, or a business; such as professionals holding assets in a professional corporation for tax purposes.
As of this writing, legislation relating to the inclusion rate hike has not yet been introduced in the House of Commons. In the meantime, Canadians are in the dark on any exemptions that may be set out in the bill while facing the fast-approaching effective date of June 25, which is making some people nervous.
It’s best to get the advice of a financial advisor, or tax advisors and accountants, since how this affects each person will vary based on circumstances. A person hoping to sell their business in the next 18 months will have a very different approach to that of someone who is looking at holding their business for the next 25 years.
Similarly, a professional who is using a corporation for tax-planning purposes is in a very different situation from a person who is considering whether to hold onto or sell a cottage.
Will these changes have a negative effect on entrepreneurship or investments into Canada?
People who have a surplus of income generally want to put it someplace where it grows quickly rather than earn interest at very marginal rates, like a bank. They will want to invest in some form of capital property. The government seems fairly certain that the changes will have a minimal effect on entrepreneurship and investment in this country. I’m not an economist, so I won’t speculate on that.
Canada has been known as a safe place for investments with a solid banking system that doesn't get rocked too much. Does this change tip it into a slightly more edgy country to invest money now, or put some capital?
I don't think so. In my experience, most people looking for safe investments are loaning money to earn interest or dividends on it, which is not a capital gain. This change won’t affect that calculus.
This change will affect people who are investing beyond registered plans in capital assets, like stocks, or speculation on real estate; here the gain is from the increase in the value of the asset, as opposed to any income the asset may earn. These tend to be higher risk, but higher reward. Even with this increase in the inclusion rate, investors will still likely come out ahead of income from a tax perspective.
Ask yourself the question: what is your intent with the property? Do you intend to hold onto it for a long time so it will increase in value quite substantially? Or are you planning to dispose of it in the near term?
If the latter describes your situation, you may want to think about crystallizing some of that capital gain.
The downside of doing so is that you may end up paying taxes up front prior to the actual disposal, and that does have some risk depending on what the value of the property is at the time you end up disposing of it. There is further risk in that we don’t know how a change in government may change the tax landscape. In any event, it’s important to run the numbers with your financial and tax advisors.
How will this change Canadians' thinking about succession planning?
If I'm a dad and looking at downsizing once my children have left the nest — and I'm selling a $2 million house to move into a $300,000 condo — this change probably isn’t going to affect me.
Or I may be thinking about rolling my cottage over to the children. This will likely have a capital gain, and there may be strategies that can be acted on now to try to offset some of that to try to keep the annual capital gain under the $250,000 annual threshold for individuals so the inclusion rate hike wouldn’t apply.
However, it’s important to run the numbers with financial and tax advisors to determine if implementing a complex strategy will save more money on tax than I would pay in professional fees.
About Mark Evans
Mark Evans is a Partner in the Business Law group at Lerners LLP in London, Ontario. He represents small and medium enterprise clients, advising and assisting them in structuring and restructuring as corporations, joint ventures, partnerships, and limited partnerships.
