Download this power point below:
DISCLAIMER
Please note that the information in this power point was based on the original Federal Budget Information and is to be updated.
This material is for educational purposes. Every effort has been made to ensure accuracy, but real-life situations are often very fact specific. Canada Revenue Agency (CRA) may not necessarily agree with all content.
Changes could be made to the Federal Budget proposals.
Budget proposals does not become law until receiving Royal Assent several months later. Once passed, Budget proposals become effective retroactively to the date of announcement or the date specified.
Professional advice should be obtained in any given situation
Impact CPA LLP and the presenters do not assume any liability for reliance on this material.
CAPITAL GAIN INCLUSION RATE
History of rate inclusion
Date Rate
To 1972 Nil
1972 – 1987 50%
1988 – 1989 66.7%
1990-1999 75%
2000-2024 50%
2024 66.67% proposed
Persons Affected
Investors with stock portfolios
Owners of rental properties
Owners of cottages and/or second homes
Business owners with gains not eligible for or over the Capital Gain Exemption
People who die
People who leave Canada
Owners of farms
Effective Date - on or after June 25, 2024
Corporations and Trusts – Increased inclusion from 50% to 66.667%
Individuals – first $250,000 annually remains at 50% inclusion excess of $250,000 increased to 66.667%
No special rules on death
Capital gain exempt under Capital Gain Exemption claim is excluded from $250,000 allowance
Capital losses and net capital loss carryovers applied first at 2/3 rate (if gain is at 2/3 rate).
Corporations
2/3 inclusion rate , so only1/3 to CDA
Applies to disposition on or after June 25, 2024
No $250,000 allowance at 50% inclusion rate
No transition rule for gains on hand
Trusts
Capital gain retained in a Trust
Tax at 2/3 inclusion rate for dispositions on or after June 25, 2024
No $250,000 allowance at 50% ( even for graduated rate estate)
Reasons NOT to Trigger
Prepayment of tax. Less left to invest
Belief that 2/3 inclusion could be reversed (possibly even in 2025)
For individual, can adopt gradual realization strategy within the $250,000 allowance
Don’t want to be pushed to pay more tax
Liquidity – don’t have the money
Other Reasons, case by case
Reasons to Trigger
Planned to sell assets shortly anyway.
Elderly people, especially with no spouse, possibly facing deemed disposition in short time window
People leaving Canada, accelerate to realize now
Imminent application of 21 year rule for Trust, without other planning options
Carry out capital gain strip (before no longer makes sense to do)
Other reasons, case by case.
What is Time Value of Money Analysis
Trigger now at 1/2 vs future at 2/3 rate
Over what period of time does time value of money make this sensible?
Examples
Assumptions
2/3 inclusion rate will be permanent (will not change in foreseeable future)
Discounted rate at 5%
After income tax effect tax
Ignore $250,000 allowance
Taxed at top personal bracket (Ontario – 53.5%)
Assume capital gain of $100 using Ontario top personal tax rate
Sell now, tax is $26.75 Left with $73.25
Sell later, tax is $35.66 Left with $64.33
Difference - $8.92
How long do you need to invest $100 to receive $9 after tax?
Assume discount rate is Rate Year
2% 5
3% 3
4% 2.33
5% 2
6% 1.5
7% 1.25%
Alternative Minimum Tax (AMT)
Triggering capital gains in 2024 may cause AMT
Depending on the personal profile, amount of gains, etc
If AMT paid, can be recovered over 7 years
Need to evaluate before recommending large gains be triggered before June 25, 2024
General Anti-Avoidance Rule (GAAR)
Amended GAAR rule apply from 2024 onward
CRA has 3 extra years to reassess under GAAR
Once passed into law, 25% penalty applies on re-assessment
New GAAR give CRA more arguments to succeed
Disclosure to CRA may avoid 25% penalty and extra reassessment period
Individuals – Pre June 25, 2024
Assumptions
Capital Gain - $1,000,000
Taxable Gain - (50%) - $500,000
Top tax bracket in Ontario – 53.5%
Tax is $267,500 (effective rate – 26.75%)
Individuals – Post June 24, 2024
Assumptions:
Capital Gain - $1,000,000
Taxable Gain- ($250,000@50%, bal @ 66.7%) -$625,000
Top tax bracket in Ontario – 53.5%
Tax is $334,375 (effective rate – 33.44%)
Corporations – Pre- June 25, 2024
Assumptions:
Capital Gain - $1,000,000
Taxable Gain - (50%) - $500,000
Corporate tax rate is 50.17%
NERDTOH rate 1s 30.67%
Top personal tax bracket in Ontario – 53.5%
Corporate Tax is $250,850 (with a dividend of $402,483 triggering a NERDOH of $153,333, Tax is dropped to $97,517).
Personal tax on the dividend is $192,154
Net to individual is $710,329 (effective tax rate is 28.97%)
Corporations – Post- June 24, 2024
Assumptions
Capital Gain - $1,000,000
Taxable Gain - (66.67%) - $666,666
Corporate tax rate is 50.17%
NERDTOH rate 1s 30.67%
Top personal tax bracket in Ontario – 53.5%
Corporate Tax is $333,334 (with a dividend of $536,644 triggering a NERDOH of $204,444. Tax is dropped to $130,022).
Personal tax on the dividend is $256,206
Net to individual is $613,772 (effective tax rate is 38.62%)
Extra 9.65%
Planning Strategies
Capital Gain Strip
Rollovers
Spread Gains for individuals – Partial sale
Reserve
Cannot use if NR in year or following year
Cannot use on sale to own corporation or partnership (controlled)
Can use for sale to Arm’s length person, spouse or family members, trusts, or corporations not controlled by seller
Originally Presented on May 18, 2024 by:
Ben Seto, FCPA, FCA, LPA
Comments