Capital Gains Inclusion Rate Hike Causes Stir Among Retirees and Business Owners
The recent budget announcement by the Liberal government has introduced a significant change to the capital gains inclusion rate, causing widespread concern among financial advisors, tax professionals, and their clients. This change is particularly alarming for business owners nearing retirement, who are now facing the prospect of a substantially increased tax bill.
The proposed modification will see the inclusion rate for capital gains rise to two-thirds (67 percent) from the previous one-half (50 percent) for individuals earning over $250,000 annually and for all corporate capital gains, effective as of June 25. The lack of accompanying legislation to enact the increase has added to the uncertainty.
Matthew Ardrey of TriDelta Private Wealth in Toronto expressed that this adjustment is a “pretty big shocker.” Although capital gains will continue to be taxed more favorably than interest income, the margin has narrowed, potentially discouraging risk-taking in investments. This shift necessitates more strategic timing for realizing capital gains.
Additionally, the role of whole life insurance in corporate estate planning is expected to grow, as it becomes akin to an investment. A private corporation can insure an owner’s life, with premiums paid by the corporation and invested by the insurer. Upon the owner’s death, the insurance payout can cover taxes on the business’s capital gains without tax implications.
The change also impacts the corporation’s capital dividend account (CDA), reducing the non-taxable portion of capital gains from 50 percent to 33 percent, thus affecting tax-free distributions to Canadian-resident shareholders.
Henry Shew of Our Family Office in Toronto advises against hasty decisions. For long-term investments, he suggests that it may be more beneficial to allow assets to compound rather than paying taxes now. However, for those already considering selling assets, acting before June 25 could be advantageous.
To assist in decision-making, TriDelta Private Wealth has developed an online calculator that considers various factors, including asset growth rate and book value.
David LePoidevin from Canaccord Genuity Wealth Management notes that some are speculating about potential political changes that could reverse this increase. Meanwhile, Jenifer Bartman emphasizes the importance of having skilled advisors to navigate these changes, especially when raising funds under a higher capital gains inclusion rate.
LePoidevin also suggests that some business owners might accelerate asset sales to benefit from the current lower rate and then hold off on future sales during the period of the increased rate. He cautions against realizing losses now, as they will be more valuable after the changes take effect.
This flurry of activity may result in a temporary boost in government revenue from capital gains taxes next April, followed by a potential decline in subsequent years as individuals adjust their retirement planning strategies to accommodate the new tax landscape.
