2024 June Update

Happy almost-end of June!

You may be aware that the recent Federal Budget announced a change to the capital gains inclusion rate. The budget announced this proposal with the official date of the change being June 25th – a kind of odd date, which Quebec accountants are not thrilled about as they have a statutory holiday on June 24th.

You may be very concerned about this, not at all concerned, or entirely unaware. It’s been Big News in the world of Canadian finance for a while and people are up in arms. This will have an impact on you if:

• You own a private corporation and that private corporation owns assets that could increase in capital value (the dollar amount for which you sell it would be higher than the dollar amount for which you purchased it)
• You are trustee or beneficiary for a trust
• You personally own investment real estate (or any other capital investment) that has increased, or could increase, in value by more than $250,000 by the time you sell it
• You or someone you love will have an estate that could incur capital gains above $250,000 at the time of their death. That last one will catch a fair number of people, particularly those that own family cottages or cabins.

We’ve been waiting on legislation and while we don’t yet have this, we do have something called a “Notice of Ways and Means Motion” as of June 10th. A more readable Technical Backgrounder can be found here. The NWMM provides some of the legislative details of the change, and the vote regarding this change has passed in Parliament. Note that while some political parties did vote against the legislation, there has not been an indication that this specific law would be repealed if there were a change in government. We don’t usually comment on the political side of policy, but it is something that people have mentioned and we have been monitoring for statements to that effect. Unfortunately, these have yet to arrive.

Personal Tax Filers

If you don’t own your own private corporation or have a trust, then the new capital gains regime starting June 25, 2024 will work like this:

• Capital gains of up to $250,000 in a given tax year will have a 50% inclusion rate
  Example: You bought a stock for $100. You later sold it for $200. The capital gain is $100. 50% of that gain, or $50, will be included in your personal tax return as income for that year.
• Capital gains above $250,000 in a given tax year will have a ⅔ inclusion
  Example: You bought a property for $100,000. You sold it for $500,000. The capital gain is $400,000. The first $250,000 of that gain would have a 50% inclusion, so that $125,000 would be added to your personal tax return. The remaining $150,000 would have a ⅔ inclusion, so that $100,000 would be added to your personal income tax return. The total would result in you having $225,000 in income added to your tax return.
  Prior to June 25, you would have had $200,000 added to your income tax return.

Note that capital gains can still be offset by capital losses. The principal residence exemption (on your home) and the Lifetime Capital Gains exemption (on the sale of qualified small business / farming/fishing property) still apply.

Personal Estates

Remember that, when we pass away, unless we have a surviving spouse who chooses to “rollover” any gains until the end of their lifetime, any capital gains on assets we own at death are realized and taxed in our final income tax returns.

Your principal residence is protected from tax through the principal residence exemption. Your TFSAs are tax-free at death. Your life insurance is tax-free at death. Note: If you are a US citizen or Green Card holder or hold US “situs” assets, the IRS has a bundle of their own estate rules.

Your RRSPs or RRIFs, if they are not transitioned to a surviving spouse, are 100% taxable as income in your terminal income tax return. This is a good reason to spend from these during your lifetime – they’re not the best estate gift.

Other assets that you own, if they have increased in value, could be subject to the above income tax regime. This will include investment accounts that aren’t RRSPs/RRIFs, or TFSAs. This will also include art, jewelry, and of course, secondary real estate of any kind.

Trusts

Trusts are legally … not people. They don’t get that $250,000 threshold, but their beneficiaries still do. This basically means that gains in a trust can be allocated out to beneficiaries and taxed in their hands. There are some special exceptions for disability trusts and certain types of estates.

Private Corporations

Private Corporations don’t get the $250,000 threshold. Capital gains inside private corporations are going to be included at the ⅔ rate as of the first dollar of gains. We’ve seen multiple calculations from a variety of sources, and it looks like this means that somewhere between 8% and 10% additional income tax would be payable on a gain after June 25, depending on your province.

Just like the capital loss rules for individuals, a corporation can also use capital losses to offset capital gains.

What does all this mean to you?

Everyone is unique, of course, and in an ideal world we have lots of time to consult with our tax planning professionals. We don’t have that right now, which is terribly frustrating for everyone involved.

If you’re wondering whether you should trigger a capital gain before the impending deadline, here are some things to consider:

• When would you otherwise be planning to sell this asset? Deferred compound growth over the long term is still an excellent strategy. Even if we might save between 8-10% income tax today, that means paying tax now, reducing the value of the asset by that amount of tax which could reduce our opportunity for deferred compound growth.
• If you own the asset personally, there have been changes to the Alternative Minimum Tax (AMT) calculation, which is an accounting thing that we honestly hope you never feel like you need to learn about, and could kind of kill the benefit of the lower inclusion rate anyway. Note that the AMT is for personal, not corporate, tax planning.
• Transactions cost money, too, not only to get stuff done but also to pay professionals. Given where the professionals are right now with demand, that price is probably going to be hefty.
• Is the capital gain and subsequent tax high enough for this to be a significant concern to you right now?

Of course, there are many more questions. The tight deadline and slow release of information has increased the likelihood that people will make decisions without having the time or information necessary to do it well. Certainly, many professionals are frustrated that any advice they give is going to be limited because of this.

Tax is annoying. The way this has been rolled out is even more annoying. Both factors could trigger an emotional decision that isn’t necessarily in your best interests. Even if you are trying to make a logical decision based on facts, the facts are mostly there, but the timing to consider these things well is limited.

The short story in our minds is: are you going to be okay on either side of the deadline? You’ll be annoyed. You probably are now. But if you’re going to be okay, then we hope that this particular piece of policy isn’t going to sideline what could otherwise be a really nice summer – which is always our wish for you.

PS: We’ve seen an uptick in mentions of potential title fraud on properties by lenders lately. We’re not sure exactly why and have been asking around. It doesn’t look like the risk has increased – and the risk is not super high or title insurance would be way more expensive. We suspect the increase in mentions is directly related to questions about paying off mortgages entirely, as this is definitely where this has come up in our practice. Title fraud definitely exists and the extent to which a mortgage protects against this is related to the fact that a mortgagor does a lot of due diligence on the title of the home, including insuring against fraud, as part of their practice to protect their investment in your mortgage. So it’s not wrong that there is a degree of protection in place, but that’s not an entire reason to keep a mortgage going if you’re happier having paid it off. There are other ways to protect your title, including getting your own title insurance, and potentially having a home equity line of credit (HELOC) against your home that you choose not to use. The HELOC could also ensure that you don’t have to re-apply for credit in the future, since lenders usually only want to give you money when you don’t need it.

Your Spring Planning Team

Practice Notes:

Spring offices will be closed on Monday July 1st for Canada Day. Our offices will also close for summer holidays starting Saturday July 27th. We will return on Monday August 12th.

As noted in last month’s newsletter, we are now booking meetings into 2025. We feel really honoured that we are able to support as many people as we do. We’re a little frustrated that we can’t help more people with more flexibility, and are continuing to develop relationships with advice-only financial planners across the country.

Julia’s role as Chair of the Financial Planning Association of Canada board is allowing her to help develop capacity in the profession so that more Canadians can benefit from high-quality, professional advice.

If you weren’t aware, advice-only financial planning was extremely rare in Canada when Julia first started in 2012. Today, the profession has over 100 practitioners that we know about across the country, and most have very long waiting lists due to the increased demand as people learn about this option. As a community of professionals, we’re working together to develop systems and technologies that can improve capacity, and also increase the number of financial planning professionals interested in choosing this model.

Thank you for your patience with us as we do our best to serve as many of our amazing clients as possible, and to be as timely with that service as possible.

Spring in the News:

Julia co-hosted the Family Enterprise Canada annual Symposium, which featured amazing stories from family enterprises, opportunities in technology, and the fantastic comedian Jessica Holmes.

Bored Panda (surprisingly, a news website) interviewed Julia for this meme and picture heavy article about helping family members financially. Scroll down about halfway for Julia’s comments.

Please check out our media page here for videos, podcasts, interviews and more.

Planning News Digest:

• Home Flipping Tax Act: BC’s Home Flipping Tax will come into effect on January 1 2025. We’ve found a good overview discussion that covers the key aspects and possible implications on you in this article.
• Important US / Canada Cross Border Tax Filing: Americans living abroad, including those in Canada, and some Canadian snowbirds tax filing deadline is quickly approaching. Here’s what you need to know.
• What Are You Retiring To? Our friend Mark McGrath at PWL Capital posted this really important personal story and we’re grateful he shared it. It’s one of the many reasons why we ask you weird questions about what you’re doing in retirement to take care of yourself and why we often recommend personal emotional support with mental health professionals during and after the transition into retirement. It’s an unexpectedly stressful transition, and while money is an important part of your retirement plan, your mental health is what makes all the difference. Read the full story here.

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