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The 2024 Federal Budget Capital Gains Inclusion Rate Increase

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Today we have a guest post written by Mohamed Rizwan Bachani, the President & CEO of Unique Accounting Services. Thank you Mohamed for providing clarity on the new capital gains hike for our clients and followers!

Mohamed Rizwan Bachani
Unique Accounting Services
909 Simcoe St. N., Suite 200
Oshawa, ON
L1G 4W1
Tel: (905) 903-7669
Fax: 1-866-209-6945
Email: info@uniqueaccountingservices.ca
Web: www.uniqueaccountingservices.ca

The implications of the 2024 Federal Budget’s increase in the capital gains inclusion rate aresubstantial and will affect many more Canadians than originally contemplated.

The 2024 Federal Budget has proposed significant changes to the capital gains inclusion rate, a move that has potentially significant tax and financial planning implications for taxpayers, especially those involved in recurring or singular high-value transactions. We will look into the specifics of these changes, their impact on different types of taxpayers, and outline strategic tax planning opportunities that could be advantageous before the new rules come into force.

The capital gains inclusion rate is not a direct tax. However, it determines how much of a capital gain must be included in a taxpayer’s taxable income. Since 2000, the rate has been set at 50%. For example, if an individual realized a capital gain of $100,000, only $50,000 would currently form part of taxable income.

The 2024 Federal Budget has proposed to increase the inclusion rate from 50% to 66.7% for dispositions of capital property occurring on or after June 25, 2024. For businesses and trusts, this rate applies to all capital gains. However, individuals will retain the 50% inclusion rate on the first $250,000 of capital gains per year. This change means a greater portion of capital gains will be taxable, effectively raising the tax burden on investments. Consider the following examples:

Impact on Individuals:

Example 1 ($100,000 total capital gain): $50,000 would be considered taxable income (50% of $100,000). As such, there is no change compared to the existing rules

Example 2 ($300,000 total capital gain): $158,333 would be considered taxable income (50% of $250,000 = $125,000 + 66.67% of $50,000 = $33,333). Hence, an additional $8,333 is added to taxable income compared to the existing rules (50% of $300,000 = $150,000)

Impact on Corporations and Trusts:

Example 1 ($100,000 total capital gain): $66,667 would be considered taxable income (66.67% of $100,000). Hence, an additional $16,667 is included in taxable income compared to the existing rules (50% of $100,000 = $50,000)

Example 2 ($300,000 capital gain): $200,000 would be considered taxable income (66.67% of $300,000). Hence, an additional $50,000 is included in taxable income compared to the existing rules (50% of $300,000 = $150,000)

Who Will Be Affected?

This change will predominantly impact:
1. High-income earners and affluent investors managing substantial capital gains
2. Business owners selling their shares for a significant gain
3. Corporations with investments in real estate, marketable securities and other capital assets
4. Estate inheritances where sizable capital gains are a factor

Tax Planning Opportunities

While it may seem like the simplest solution would be to incur capital gains prior to the proposed effective date of June 25, 2024, there are several variables at play and customized professional advice is vital to maximizing your tax savings. Some potential options are listed below to consider.

1. Realizing Gains Before the Change

Realizing the sale of assets before June 25, 2024, allows individuals and corporations to benefit from the current lower inclusion rate. Some potential pitfalls to this strategy include triggering alternative minimum tax. If selling residential real estate, properties held less than one year may be subject to the residential property flipping rule resulting in 100% of the gain being included as taxable income.

If a taxpayer has realized/unrealized capital losses, crystallizing a capital gain prior to June 25, 2024, becomes worth considering. This option may lead to cashflow issues as the tax needs to be paid without receiving any proceeds.

2. Strategic Use of Lifetime Capital Gains Exemptions

Maximizing use of the Lifetime Capital Gains Exemption (LCGE), which is increasing to $1.25 million, can significantly reduce taxable gains from the sale of qualified small business corporation shares and similar assets. Involving a family trust in the share ownership should be considered to potentially multiply the LCGE.

3. Revisiting Estate and Succession Plans

With higher future taxation on gains, revising estate and succession plans to incorporate these changes is crucial, potentially involving earlier transfers or restructuring of asset ownership. Life insurance planning to account for increased capital gains taxation on the death of a shareholder should also be reviewed.

4. Corporate Investing

Corporations might want to consider crystallizing gains prior to June 25th to enhance the corporation’s Capital Dividend Account which will otherwise be reduced from June 25th. The CDA represents the non-taxable portion of a corporate capital gain that can be extracted from the company tax-free. The cash obtained by the individual shareholder can then be invested in capital property and take advantage of the lower capital gains inclusion rate on the first $250,000 of annual capital gains which would not otherwise be available at the corporate level.

Also, consider investing in certain corporate class mutual funds that are structured to defer capital gains and provide for cash flow in the form of tax-free return of capital prior to their disposition. Corporate owned permanent life insurance with an investment component also serves to provide estate planning combined with tax free appreciation.

Conclusion

The upcoming increase in the capital gains inclusion rate presents both challenges and opportunities. Taxpayers, particularly those with potential high-value sales of capital property should consult with their tax advisors to assess the best strategies in light of these changes.

Thanks again to Mohamed Rizwan Bachani, President & CEO of Unique Accounting Services for writing this guest post for us!

Buying a cottage, Muskoka Financial

MONEY MAKES YOUR WORLD GO ROUND IN MUSKOKA

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I was just reviewing some great, simple rules to follow to enjoy and use money well. These are rules shared by Brian Buffini. I follow these rules to the best of my ability.

I have found that Brian Buffini is a great coach. What makes a great coach? In my view, it is someone who has been there and is now sharing ideas and methods to be able to replicate the success that they have had.

Brian is someone who started out poor and broke and quickly realized that broke is a state of your bank account and can be temporary. Poor is a state of mind and one needs to change that with education.

So here are some ideas to secure your financial future:

  1. Understand yourself and understand that you are not alone. Over 80% of people avoid thinking and talking about money. They are afraid of managing money and afraid to look at where they stand because they don’t have a plan and are afraid of losing their money. Trust me – it ends up being much scarier not to look.
  2. People worship money. They spend a lot on lottery tickets – and the odds are so much better betting on yourself.
  3. Change how you feel about yourself. Your status is who you are, not what you have. So that takes some internal work. But trust me, it feels great to nurture yourself in the right way. Fill the hole with good thinking, not money. Feel good about yourself.
  4. Secrecy – embarrassment and shame. You have made mistakes. Your biggest mistake is thinking that you are alone. People in the Financial Services industry say that you would be surprised at how many people avoid looking at their financial situation and taking the reins. You are definitely not alone! And not embracing your finances creates conflict with your partner, if you have one.
  5. Confusion. How much advice is out there? And how many sources are credible. You have to think of what the net worth of the person who is providing advice happens to be. Are they just making money from writing the book, or do they have a healthy and thriving net worth?
  6. Follow a high performance mindset – Knowledge is power and ignorance is bankruptcy.
  7. Money is a tool to be respected. It is just a tool, but you need to know how to take care of it, and how to use it.
  8. You need to have a grounded identity. Money cannot buy character.
  9. Clarity and alignment – what do you want money to do for you and is it aligned with your values? How are you spending your time and what do you believe. Take the time to figure this out, so you don’t end up in the wrong destination.
  10. You need a path to follow. Run on the right track.

STRATEGIES FOR STABILITY

Defensive and Offensive

Defensive:

  1. Working home budget to pay down debt, will, automatic savings and one month reserve.

Offensive:

  1. Invest in yourself, build equity in your home, establish your retirement fund.

The former stability strategy stays in place for the rest of your life, no matter how wealthy you become. It is your platform for stability and security.

STRATEGIES FOR SUCCESS

Defensive and Offensive

Defensive:

  1. Go from reducing your consumer debt, to having no consumer debt, automatic savings, and three to six months reserve. Fully fund your retirement fund.
  2. Learn to live on 70% of what you make, save 10%, give 10%, invest 10%.

Offensive:

  1. Get to 50% equity in your home at least.
  2. Increase your revenue. Figure out how to make more money. Promotion at work, a side gig, real estate investments, (67% of millionaires made their money investing in real estate), stocks and bonds.

STRATEGIES FOR SIGNIFICANCE (Giving back)

Defensive and Offensive

Defensive:

  1. All real estate holdings paid off. Your real estate is safe from repossession if it is paid for.
  2. Establish a trust.
  3. Have passive income to support you until you are 100 years old.

Offensive:

  1. Give money and time to charities and causes that you are passionate about. Time first, money second.
  2. If you own a business, set it up so that it is true legacy.

I think Brian Buffini has some great, tried and true ideas. What do you think?

A good accountant can help you set this up. Please let us know if you need a referral to an accountant.