On June 6, 2024, Cumberland hosted a webinar on a proposal in the last Federal Budget that would see the capital gains tax inclusion rate rise from 50% to 66.67%. A few days later, the government tabled legislation in Parliament to be voted into law. Here are some of the highlights.

Following an introduction by Cumberland partner and CEO, Charlie Sims, the discussion was kicked off by Peter Routly, CPA, CA; TEP, a Partner in the Canadian Tax practice at BDO who was in Ottawa for the unveiling of the budget.

He started by illustrating the impact of the higher inclusion rate using the example of someone who sold a stock for $100 that had originally been purchased for $10, thus realizing a capital gain of $90. Under the current rules, they would only add half of the gain, or $45, to their personal taxable income. Under the new rules, they would owe tax on two-thirds of the gain, or $60. For investors in Ontario’s top tax bracket, this equates to an 8.92% tax increase on capital gains.

He also outlined an important distinction: for individual tax filers, the higher capital gains tax inclusion rate is only applied to capital gains in excess of $250,000 in a given year, but for corporations and trusts, the higher rate is applied from the first dollar of capital gains.

Mitigating the financial impact

Mr. Routly provided an overview of some of the main considerations for those seeking to mitigate the financial impact of the higher tax, including:

• • Considering the sale of capital assets before the law comes into effect after June 24, 2024
  • The deemed disposition of capital assets that occurs upon death or emigration from Canada
  • Planning to crystallize accrued gains, and some of the complexities that can be involved, including Alternative Minimum Tax (AMT) rules
  • Intentionally triggering a gain inside a professional corporation, and the associated risks, such as the potential to lose the small business deduction
  • Expected changes to the Capital Dividend Account that would end the ability to withdraw 50% of a capital gain tax-free from a corporation, and reduce it to one-third

For many Canadians, selling capital assets before the deadline to take advantage of the 50% capital gains inclusion rate before it’s gone may have been the most straightforward tax mitigation strategy, and Mr. Routly outlined some key questions to help assess the potential appropriateness of this strategy:

• • How long were you originally planning to hold the asset?
  • Were it not for an imminent tax increase, would you even be considering a sale?
  • What will it cost you to sell it now?
  • What return would you have expected over your original time frame?
  • What is the total value of the asset versus its accrued gain?

It was suggested that, for many investors with significant private business interests and other valuable assets, the cost of selling before the rule change was not justified by the expected tax savings.

With so many issues to consider and the complexity of each individual situation, Mr. Routly said that it’s difficult to make blanket recommendations, and that each tax payer must conduct their own analysis along with their tax, legal and wealth advisors.

Questions and answers

Following Mr. Routly’s overview of the proposed tax, he was joined by Jeff Noble, CMC; FEW Director of Business & Wealth Transition Private Wealth at BDO for an in-depth Q&A session with Charlie and the webinar participants.

Some of the many topics covered included:

• • Comparing and contrasting the current legislation with the many changes that have been made to the capital gains tax rules dating back to the 1970s
  • The applicability of General Anti-Avoidance Rules (GAAR) to those who seek to sell and then immediately repurchase assets with the intent of avoiding the higher tax rate
  • Estate planning for families who will have significant capital gains from real estate and other assets upon death
  • Charitable giving strategies in the context of the higher capital gains tax inclusion rate and AMT
  • A deeper dive on tax planning considerations for those with capital gains inside a corporation, including the Capital Dividend Account
  • Insights into behind-the-scenes lobbying efforts that could have resulted in changes to the substance or timing of the new rule
  • Coping with the uncertainty of tax planning in a shifting legislative environment

If you have any questions about your personal tax planning situation or would like access to a video replay of the webinar, please contact your Cumberland Portfolio Manager or Financial Advisor.