Capital Gains Inclusion Rate Increase
The Federal Government announced that the capital gains inclusion rate will increase from 50% to 66.7% for trusts, corporations, and individuals (above $250,000 in gains). This announcement has caused much anxiety for Canadians with capital property. However, before making any rash decisions, we believe you should consider the following:
Timeline for selling.
Would your timeline for selling the asset change if there were no proposed tax changes? If not, and you plan to hold onto it long-term, you may be better off not doing anything. However, it’s simple arithmetic to determine if it makes more sense to sell. Considering an 8% growth rate, the breakeven point would be six years. If you plan on selling the asset within the next six years, it may be better to sell it before June 25th to lock in the 50% inclusion rate. The tax savings gained by paying tax at 50% vs. 66.7% is more than the growth earned on the asset until the 6th year. Another consideration is the opportunity cost of the funds used to pay the capital gains tax. You would no longer have those funds to grow and potentially act as an additional income source in retirement.
Higher Lifetime Capital Gains Exemption Limit.
For those holding shares in a small business, a farming property, or a fishing property, the Lifetime Capital Gains Exemption (“LCGE”) is increasing from approx. $1,017,000 to $1,250,000. Although the inclusion rate is increasing from 50% to 66.7%, the amount of LCGE is increasing to accommodate the increased tax obligation. It may not offset the tax obligation from the increased inclusion rate, but it may be sufficient to give second thoughts about a sale.
Don’t make a knee-jerk reaction.
The increase in the inclusion rate is still a proposal. Although it will most likely be made law, changes to the rate could occur. In that time, as an individual, you could trigger incremental gains over a more extended period to remain under the $250,000 threshold.
Do you have additional questions? Feel free to contact your TMFG advisor to discuss how to navigate these changes best.
