It has been over 20 years since we’ve seen changes to the capital gains tax. Since late 2000, 50 percent (1/2) of realized capital gains have been subject to tax. As of June 25, 2024, the inclusion rate increases to 66.67 percent (2/3) for corporations and trusts, and on the portion of capital gains realized in the year that exceed $250,000 for individuals.* The table shows the impact on a capital gain of $500,000 for an individual (assuming no other gains). Are there ways to manage the potential tax bite? Here are a handful of ideas:
Weigh the benefits of a lower inclusion rate — Tax deferral is commonly viewed as a way to create greater returns since funds that would otherwise go to pay tax can remain invested for future growth. However, individuals may wish to evaluate the possibility of accelerated taxation at a lower rate versus deferred taxation at a higher rate: a higher inclusion rate for gains over $250,000. For example, based on a capital gain of $100,000 and a marginal tax rate of 48 percent, an investor would save $8,000 in taxes by realizing a gain at the lower inclusion rate. Yet, this comes at the cost of “pre-paying” $24,000 in capital gains tax today. If this amount was invested with a return of 6 percent per year, it would take 7 years of tax-deferred growth, based on a 2/3 inclusion rate, to beat the $8,000 in tax savings.
Spread gains over multiple years — If possible, consider realizing gains over multiple years to take advantage of the lower inclusion rate (under $250,000) versus a larger realized gain in a single year.
Crystallize gains — Deliberately selling and rebuying stocks to trigger a capital gain (“crystallizing”) can reset book value over time, potentially decreasing future unrealized capital gains. This strategy, often used in years when an investor is in a lower tax bracket, may help to capitalize on the lower inclusion rate each year.
Plan to cover increased tax liabilities — Plan ahead for an increased tax liability. The use of insurance or other planning techniques may be considered to cover the eventual higher tax liability, such as for the transfer of family property.
Donate securities — Assuming new rules apply to the deemed disposition of assets at death, if you’re considering donations in estate planning, consider the use of publicly-listed securities to a registered Canadian charity as any accrued capital gain is excluded from taxable income and a donation receipt equal to the value of the donated securities is received.**
Business owners — Evaluate whether certain assets should be held in the corporation or owned personally. For corporations, there is no $250,000 threshold; realized gains are taxable at a 2/3 inclusion rate. The use of corporate-owned insurance or an individual pension plan may be considerations for a business’ tax strategy. Plan ahead to use deductions, such as the lifetime capital gains exemption, to reduce taxes payable on the disposition of qualified shares.
As always, seek advice from a tax expert regarding your situation.
How Much More For a $500,000 Gain?
*Note: At the time of writing, legislation has not been enacted.
**If managing over a lifetime, this applies to individuals not affected by the AMT.
.png)
