After the Government of Canada released the details of the 2024 Federal Budget earlier this week, there has been much discussion about the proposed changes to how capital gains will be taxed after June 25, 2024.

 

At a high level, the proposed changes are as follows:

• For Corporations and Trusts
  • Increase the capital gains inclusion rate from 1/2 (50%) to 2/3 (66.67%)
• For Individuals
  • Increase the capital gains inclusion rate from 1/2 to 2/3 on the portion of capital gains realized in the year that exceed $250,000, either directly or indirectly via a partnership or trust, net of any:
    • Current-year capital losses.
    • Capital losses of other years applied to reduce current-year capital gains; and
    • Capital gains in respect of which the lifetime capital gains exemption, and other measures proposed in this Federal Budget which we will not discuss here.

It is important to remember that the inclusion rate is not your tax rate! Let us look at an example.

 

Let us assume in 2024 you generated $100,000 in capital gains from an investment portfolio personally held by you and this was the only capital gain you realized in the calendar year. Your capital gains under the current regime and the proposed regime would be as follows:

	Before June 25, 2024	After June 25, 2024
Capital Gain	$100,000.00 CAD	$100,000 CAD
Inclusion Rate	1/2	1/2 on first $250,000 2/3 on amounts above $250,000
Taxable Capital Gain	$50,000.00	$50,000.00

 

Now let us assume your total taxable income for the year was $250,000 and you reside in Ontario. Your average tax rate would be 36.19% and your top marginal tax rate would be 53.53%. To simplify this example let us assume your taxes payable is calculated based on your top marginal tax rate, which is not the case in real life. The taxes payable in this example would be as follows:

$50,000 (Taxable Capital Gain) X 53.53% = $26,765 Taxes Payable

Though you generated $100,000 in capital gains in 2024 your taxes payable on this amount would be $26,765 and you keep $73,235 - you do not pay a tax rate of 50% on the $100,000 as this would be confusing your inclusion rate for your tax rate.

 

When thinking about capital gains remember, your inclusion rate is the total amount of the gain that is considered taxable income and you pay income taxes on this amount based on your personal tax rate in the given year.

 

Despite the changes to the inclusion rate, capital gains remain a more tax-efficient income source relative to fully taxable sources such as interest income and withdrawals from registered plans such as RRSPs or RRIFs. Strategies to consider moving forward are:

• Be mindful of the capital gains you are triggering in your personal name each year. If your income plan allows, keep your net capital gains below the $250,000 CAD threshold annually.
• For your estate planning, consider reviewing the impact this will have to the taxes payable by your estate. If you have a sizable capital gain that will pass through your estate, and you are not survived by a common-law spouse or partner, this will result in a substantial tax bill. To mitigate the impact to your heirs, using a tax-exempt life insurance policy may be a more appropriate way to pass on these assets and can pay the anticipated taxes owed by your estate.
  • An example where these proposed changes are meaningful for individuals is on the sale of real property - such a family cottage. Your assets are deemed to be disposed of at Fair-Market Value on your date of death. Should they not pass to an eligible common-law partner or spouse, your estate must realize any capital gains.
  • Let us say you purchased your family cottage for $300,000 CAD and upon your passing the property is worth $1,750,000 CAD - your estate would realize a capital gain of $1,450,000. With the new inclusion rate applied the amount of this gain that is declared as taxable income increases from $725,000 to $845,000. Assuming a top marginal tax rate of 53.53% (Ontario) this results in the taxes payable increasing from $388,092.50 to $452,328.50 which is a differential of $64,185.50!

 

As always, if you have questions or want to understand how these changes impact you further feel free to reach out to me directly at 416-699-0183, send me an email at matthew.valeriati@rbc.com or you can Contact Us Here.