The federal government’s new capital gains inclusion rates mean that, in certain circumstances, Canadians will now be paying more tax on their gains from capital asset transactions. For many investors, this will be a game – and net gain – changer. Here is a quick overview of the key changes, some scenarios demonstrating how the changes might impact various types of transactions and taxpayers, and strategies to consider to help minimize the impact.
Capital changes – overview of capital gains inclusion rate changes
Prior to June 25, 2024:
Individuals, trusts and corporations that realized capital gains during the tax year – whether through holdings (stocks, bonds, mutual funds) in non-registered investment accounts, or secondary properties, such as cottages and investment properties – the capital gains tax inclusion rate was 50%.This means that for every $1.00 in net capital gains you generate, you must include 50% - or $0.50 - of your gain in your taxable income, while the other $0.50 is untaxed. This differs in the way, for example, employment income is taxed, for which 100% of every $1.00 of earnings is treated as income and is fully taxable.
Starting June 25, 2024:
Individuals:
- Net capital gains greater than $250,000 in a year: Individuals who realize more than $250,000 in net capital gains in a year – whether through holdings (stocks, bonds, mutual funds) in non-registered investment accounts, or secondary properties, such as cottages and investment properties, the net capital gains tax inclusion rate is now 66.6% (or 2/3rds).
- Net capital gains up to $250,000 in a year: For individuals with gains up to $250,000, the net capital gains tax inclusion rate remains at 50%.
Trusts and corporations:
- For all net capital gains reported by trusts and corporations (regardless of whether it is an operating, holding or professional corporation), the net capital gains tax inclusion rate is now 66.6% (or 2/3rds).
Note: The 50% inclusion rate on net capital gains up to $250,000 is not available to corporations and trusts after June 24, 2024.
What’s not changing?
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For individuals with net capital gains under $250,000, the net capital gains tax inclusion rate will remain at 50%.
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If you hold investments in a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or other registered plans, the new tax rules for capital gains do not affect you.
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The changes do not impact your primary residence capital gains exclusion – this remains in place, and there are no plans to change this at the present time.
Easing the pain – strategies to reduce the impact of the new inclusion rates
Few if any individual taxpayers who are disposing of capital assets after June 24, 2024 and generating net capital gains above the annual $250,000 threshold will be able to avoid paying more on their tax bill because of the increase in the capital gains inclusion rates – and the impact will clearly be felt for trusts and corporations.
To lessen the blow, here are a few strategies to consider and discuss with your Investment Advisor and tax advisors, if applicable and relevant to your unique circumstances:
- Realize capital gains under $250,000 threshold – If you have a portfolio of investments with large, accrued gains, consider disposing of your investments slowly over time to ensure you keep your capital gains realized below the $250,000 annual threshold.
- Charitable donations – There’s a tax incentive for those who donate certain publicly traded securities. In-kind donations of these securities made to a qualified donee are entitled to an inclusion rate of zero. As such, if you have appreciated securities, you may wish to consider donating these securities to a charity instead.
- Maximize the available room in your registered accounts – As income earned in registered accounts such as Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs) or Registered Education Savings Plans (RESPs) are not subject to tax, ensure you’ve maximized your contributions to these accounts, as appropriate.
- Consider gifts to family members – Consider gifting amounts to family members where they have not yet maximized their contribution amounts to their own registered accounts. For example, you may gift funds to your spouse or adult children and grandchildren and have them contribute those funds to their own TFSA. Normally, if you gift funds to your spouse, the attribution rules apply so that all the income earned, and capital gains realized on those funds, will be attributed back to you and taxed in your hands. However, there’s an exception for TFSAs and the attribution rules will not apply to income earned and capital gains generated within these accounts that’s derived from such contributions.
- Maximize future income splitting – If you have a spouse who earns less income than you or other family members with little to no income, you may want to consider implementing an income splitting strategy. Income splitting shifts income that would otherwise be taxed in your hands at a high marginal tax rate to your lower-income spouse, children, or other family members to take advantage of their lower marginal tax rates.
- Split the bill – If an asset is held jointly by two individuals (i.e., spouses) and the asset is sold, the $250,000 threshold applies to each individual. So, assuming attribution rules do not apply, when a jointly held asset is sold, each individual would recognize their proportionate gain or loss on the sale. For example, if a couple owns an asset jointly and equally, and they sell the property realizing a gain of $500,000, $250,000 will be taxed in one spouse’s return at 50%, and the other $250,000 will be taxed on the other spouse’s return at 50% (assuming there are no other capital gains realized in the year).
Caveat venditor (seller beware) – don’t turn a gain into a loss
Please keep in mind that each individual, corporation and trust is unique and must consider their own circumstances to best manage the new, higher inclusion rates. Importantly, and again, please ensure that you speak to your Investment Advisor and/or your tax advisor first before taking any action that may result in a capital gain be realized – or deemed to have been realized for tax purposes – as no one wants to get caught in today’s larger inclusion net if it isn’t necessary.
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under license.