Wednesday, June 12, 2024

Capital gains tax changes — what you need to know

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Trudeau government pushing ahead with June 25 deadline

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Finance Minister Chrystia Freeland formally introduced the capital gains tax inclusion rate hike to the House of Commons on Monday, increasing the rate to two-thirds from 50 per cent on capital gains of $250,000 or more for individuals and all capital gains for corporations and trusts with a couple of new exceptions.

Unfortunately for the many who have criticized the plan, the proposed legislation wasn’t much different from what was outlined in the federal budget announced in April. But based on the preliminary broad strokes, here’s how the changes might affect you before June 25, which is when taxpayers have to act even though the laws won’t likely be in effect until the fall.

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If you own a cottage or second property

Capital gains of more than $250,000 on a non-principal residence will be taxed at the two-thirds inclusion rate under the new rules that take effect June 25. The government is hoping a lot of people sell now in order to take advantage of the 50 per cent inclusion rate and help it raise $19.4 billion over the next five years to pay for programs, but it may not make sense in all cases, especially if you plan on keeping the property for several years.

“If you are older and have big capital gains on your cottage, it might make sense to change ownership (soon), effectively putting an estate freeze on the cottage value and paying the lower capital gains tax,” says TriDelta Private Wealth financial planner Ted Rechtshaffen. “Remember that you would still need to come up with the money next spring to pay the big tax bill.”

As expected, your principal residence will not be subject to the new inclusion rate.

If you have an investment holding corporation or trust

Whether to sell investments with unrealized gains now or not depends on how long you intend to hold them and where you hold them. The inclusion rate hike applies to capital gains of more than $250,000 in a year for individuals, but it starts at dollar one for corporations and most trusts.

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“Essentially, you are doing a break-even analysis on paying a lower capital gains tax now and being out of pocket on those taxes versus whether you would be better to hold on to that money now, but pay a higher tax rate when you eventually sell,” Rechtshaffen says. “If you plan to hold an investment for the long term, especially if it is one that you expect to have fairly high annual returns, you might want to hold it. But in most cases, if you think you might sell in the next two or three years anyway, it would be better to sell now.”

However, the “safe harbour” inclusion of $250,000 has been extended to graduated rate estates and qualified disability trusts.

“The guidance provided today is an important step in reducing uncertainty for taxpayers,” John Oakey, CPA Canada’s vice-president of tax, said in a release. “But with only two weeks remaining until the June 25 implementation date, we are concerned that some taxpayers will have insufficient time to arrange their affairs.”

If you own a small business or professional corporation

Many Canadians operate their businesses indirectly through private corporations, which will not fall under the $250,000 personal capital gains limit.

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“In order to properly align the government’s policy, we believe it is imperative that the rules be drafted to allow Canadian individuals the ability to share their annual $250,000 safe harbour with a private corporation of which they are a (direct or indirect) shareholder,” the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada said in a letter to the federal government on May 1.

The Canadian Medical Association is also against the hike.

“If implemented, the capital gains proposals will undoubtedly add undue pressure and financial strain to physicians, threatening their well-being and undermining the stability of the Canadian health-care system as a whole,” it said in a May 30 submission to Freeland.

The Canadian Federation of Independent Business said it is disappointed the government didn’t listen to small business concerns. It said the changes affect more than just the wealthiest Canadians, with a survey showing 55 per cent of small-business owners believe it will affect the eventual sale of their business, 45 per cent say it will affect the investments they hold privately and 41 per cent say it will affect investments in their incorporated businesses.

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“Today’s announcement and the associated rhetoric from government reinforce that the proposed capital gains changes are about politics, not tax fairness,” it said in a release.

If you were thinking of investing in Canada

Think again, say industry groups.

The Mining Association of Canada said the hike will hurt companies looking to get financing for mineral exploration and diminish the effect of extending the Mineral Exploration Tax Credit (METC) to March 25, 2025, and expanding the Clean Technology Manufacturing Investment Tax Credit (CTM-ITC).

“The proposed new threshold for the CTM-ITC is welcome, but the changes to capital gains may undermine the METC and harm mineral exploration financing,” Pierre Gratton, the association’s chief executive, said in a press release.

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The proposed changes include a boost to the lifetime capital gains exemption for business owners to $1.25 million from a little more than $1 million. The government also introduced the Canadian Entrepreneurs’ Incentive, which it says reduces “the inclusion rate to one-third on a lifetime maximum of $2 million in eligible capital gains.”

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