Changes to Capital Gains Taxation

Are You Ready for the Higher Capital Gains Tax Rate Starting June 25, 2024?

Normally after April 30, personal income tax season is done – but not this year! The Federal Budget earlier this year threw us a curveball, announcing an increase in the capital gain inclusion rate for personal capital gains above $250,000 to 66 2/3rds%. This will result in an approximate increase in capital gains tax personally at the top rates in Canada for personal capital gains above $250,000. It’s worse if you trigger capital gains inside a corporation where the inclusion rate increase applies to all capital gains and the higher tax rates applies to the entire capital gain realized. 

Who is Impacted?

  • If you have taxable investment accounts holdings stocks, bonds, ETFs or other securities that have existing gains on them, you may be impacted.
  • If you own rental real estate personally or in a corporation, you may be impacted.
  • If you own vacation property that is not shielded by your tax free principal residence exemption, you may be impacted.
  • If you are emigrating from Canada and have assets with gains on them to declare at departure, you may be impacted.
  • If you are older and could die in only a few years, you may be impacted.
  • If parents and children are poised to share assets like a cottage inter-generationally in an estate plan, you may be impacted.
  • If you have designed an estate plan to include life insurance to pay a fixed taxation amount, you may be impacted.
  • If you plan to give securities, real estate or other assets to family members (e.g. kids) that would face a deemed disposition, you may be impacted.
  • If you are caught by “change in use” rules for real estate, you may be impacted.
  • If you own shares in a business venture that will be taxable on sale, you may be impacted.

Your home (as your principal residence for tax purposes), GICs, cash, RRSPs, RRIFs and TFSAs are not impacted.

Keeping It in Perspective

When is the last time you triggered $250,000 in capital gains selling securities? Not often, right? So there is likely nothing you need to do related to your portfolio if your holdings are focused on the long term (meaning 5 years or more). The math shows that the continued deferral of tax by not selling in the portfolio will generate more compounded investment returns over time and that over several years this will offset the increased tax rate – if it ever applies to you.

Small business owners and incorporated professionals who can sell their shares in retirement and in an estate will see the lifetime capital gains tax free exemption raised to $1,250,000 – a huge jump in tax free money from only a few years ago. So this is good news for business owners.

Areas to Focus On

The areas to focus on for pro-actively looking at whether you should realize capital gains now before the deadline and benefit from the lower tax rate are:

  1. Real estate you plan to sell in only a few years from now
  2. Real estate you may gift to a child in only a few years from now
  3. Elderly family members who own real estate or securities or both that are taxable and are sitting on big capital gains.
  4. Stocks, ETFs, mutual funds and similar investments with big gains where you know you will be liquidating these investments in the short term because you have a specific need for the funds all at once.

Rule of Thumb

If you do nothing before June 25, 2024, an investment asset needs to earn an average of 6%/year for several years in order for you to be better off paying a higher capital gains tax rate later. Keep in mind personally this is on capital gains above $250,000/year. So if your assets are long term focused and you have a good ten years, you will likely come out ahead by not selling now. 

For investment assets and real estate held in corporations, the math is more complicated and scenarios should be evaluated with your accountant. 



KURT ROSENTRETER
Portfolio Manager, Manulife Wealth Incorporated
President, Upper Canada Capital Inc.
Life Insurance Advisor, Manulife Wealth Insurance Services Inc.

2848 Bloor Street West
Toronto, ON M8X 1A9
Phone: 416-628-5761 ext. 230
Fax: 416-225-8650
Kurt.Rosentreter@manulifewealth.ca

Disclosures

Upper Canada Capital is a trade name used to carry on business related to life insurance and stocks, bonds and mutual funds. Investment dealer dealing representatives (“Investment advisors”) registered with Manulife Wealth Inc. offer stocks, bonds and mutual funds. Insurance products and services are offered through Upper Canada Capital Inc. and Manulife Wealth Insurance Services Inc. Banking products and services are offered by referral arrangements through our related company Manulife Bank of Canada. Additional disclosure information will be provided upon referral. Please confirm with your Advisor which company you are dealing with for each of your products and services.

Manulife, Manulife & Stylized M Design, Stylized M Design and Manulife Wealth are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.


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