Canada’s federal budget proposed to increase the capital gains inclusion rate to 66.67% from 50% for gains realized on or after June 25, 2024. The new rate applies to net capital gains exceeding $250,000 per year for individuals. In planning for efficiency, you may have decided to realize capital gains by disposing of shares, real estate, or even private company shares prior to June 25, 2024, at the lower inclusion rate.
Our article focuses primarily on potential strategies that may help mitigate and manage the tax impact of realizing significant capital gains.
Realizing sizeable capital gains in 2024 may result in a hefty tax bill for the year. For example, let's assume you determined that a portfolio rebalancing was appropriate, and you sold a large quantity of securities prior to June 25, 2024. If the market value of the securities you sold was $600,000 and the adjusted cost base was $100,000, you would have realized a capital gain of $500,000. Assuming your marginal tax rate for 2024 is 53% and given that those capital gains will be included in your income at 50%, your tax liability solely on the realization of these gains would be $132,500. To help mitigate and manage the tax impact, you could consider the following tax planning strategies.
Contribute to an RRSP
If you have unused RRSP contribution room, a simple way to reduce your taxes would be to contribute to your RRSP. If you contribute to an RRSP, you can deduct the amount of your RRSP contribution from your taxable income, up to your annual RRSP deduction limit. An RRSP contribution can be deducted against any type of income, including taxable capital gains. If you contribute to your RRSP anytime between now and March 3, 2025, you can reduce the taxes you have to pay for the 2024 tax year.
If you can no longer make RRSP contributions because you're aged 72 or over or you're turning 72 this year, you may still be able to make a spousal RRSP contribution if your spouse is younger. Any contributions you make to a spousal RRSP utilizes your own RRSP contribution room and can be claimed on your tax return and deducted against your taxable income.
Donate securities in-kind
Whether you've made a philanthropic commitment or simply want to assist a registered charity, consider donating securities in-kind, especially if you don't have cash on hand at the moment. It may cost you less to donate securities than to donate cash. This is because when you donate securities in-kind, you benefit not only from an elimination of the capital gain being accrued on the securities, but also from a donation tax credit based on the value of the securities. The donation tax credit may help reduce the tax liability on the capital gains triggered.
Although there's no limit to the amount you can donate in a year, for tax purposes, you can generally only claim a charitable donation of up to 75% of your net income in a taxation year. If you're unable to claim the full donation in one year due to this limitation, all is not lost since you can carry forward your unclaimed donations for up to five years.
Carefully utilize capital losses
If your portfolio contains investments that have decreased in value and are no longer aligning with your investment strategy you may be thinking of selling these investments before December 31st, 2024, in order to realize the capital loss.
Therefore, you're required to separately identify capital gains and losses realized before June 25th, 2024 (Period 1) and those realized on or after June 25th, 2024 (Period 2). Gains and losses from the same period are first netted against each other. Specifically, any capital losses you realized in Period 2, prior to December 31st, 2024, will first be offset against capital gains realized in Period 2. After the offset, if there are still excess capital losses those net losses will be offset against capital gains realized in Period 1.
As such, you'd ideally want to use the capital losses you realize in Period 2 to reduce any capital gains realized in Period 2, to the extent the gains are over $250,000 and are subject to the 66.67% inclusion rate. Be careful with the amount of capital losses you realize in Period 2, net losses may end up offsetting capital gains realized in Period 1; this may defeat what you were trying to accomplish by realizing significant capital gains that are subject to the 50% inclusion rate.
Carefully utilize capital loss carry-forwards
Any unused net capital losses can be carried back to the claim against taxable capital gains realized in those three previous years or carried forward indefinitely to be claimed against taxable capital gains realized in a future year. If you have an unused net capital loss balance carried forward from previous year, this unused net capital loss balance may be used to offset capital gains that are subject to the 66.67% inclusion rate.
When tax planning, it may now be more tax efficient to carry forward unused net capital losses from prior years to offset a capital gain that's subject to the 66.67% inclusion rate rather than to carry back the loss to offset a capital gain that’s subject to the 50% inclusion rate.
Plan ahead
As part of proactive planning for the future, it's important to discuss your situation with your qualified tax advisors, understanding the significance of realizing capital gains in 2024 and the potential impacts based on your personal situation. There may be opportunities to minimize tax and preserve your net worth.
Vito, Eric and Rachelle
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