The latest Federal Budget for 2024-2025 brings significant changes to Canada's tax landscape, especially for those with high unrealized gains in their portfolios and corporate owners using their corporations to invest and compound capital.
Here's a snapshot:
Revenue Boost: The government expects to net nearly $7 billion this fiscal year and close to $20 billion over the full five-year fiscal horizon with an increase in the capital gains inclusion rate.
Impacts: Individuals and corporations will face higher taxes on the sale of investments and capital property. For instance, individuals subject to the top marginal tax rate can expect an 8%-9% increase in taxes on capital gains over $250,000 realized after June 25, 2024. Corporations and trusts will see an immediate tax rate increase on all gains.
New Inclusion Rate: The government plans to raise the inclusion rate on capital gains realized annually above $250,000 by individuals and on all gains realized by corporations and trusts from 50% to 66.67%.
Effective Date: These changes will apply to capital gains realized after June 25, 2024.
Brief Case Study for Impact of Capital Gain Inclusion Rate
John and Mary, an 85-year-old couple, have diligently saved throughout their lives, amassing a substantial portfolio of $2 million in their joint non-registered investment account. Within this portfolio, they hold $1 million in unrealized capital gains.
Previously John and Mary had no plans to sell and realize their investment portfolio in the future. However given the Capital Gain Inclusion Rate change they are debating if it is worth to realize all gains before June 25th, 2024 with 50% inclusion rate or not.
Let's look into the impact of two different capital gain inclusion rates on the tax payment in this scenario:
Capital Gain Inclusion Rate: 50%
With a capital gain inclusion rate of 50%, only half of the realized capital gains are subject to taxation.
John and Mary's realized capital gains in the amount to $1 million, under this rate, $500,000 will be taxable capital gain, resulting in $250,000 of taxable gain for each of them.
Assuming an average tax rate of 25%, the tax liability would be:
John - $250,000 x 25% = $62,500
Mary - $250,000 x 25% = $62,500
Total Income Tax to pay = $125,000
Increased Capital Gain Inclusion Rate - 66.67%
With a higher capital gains inclusion rate of 66.67%, two-thirds of realized capital gains above $250,000 will be subject to taxation after June 25th, 2024.
Following up with the same scenario:
John & Mary have $1,000,000 in total realized gains, which results in the following:
John - realized capital gain $500,000:
First $250,000 of the unrealized gains are included in the calculation with 50%, therefore the taxable capital gain is $125,000.
The second $250,000 of gains is taxed with the increased inclusion rate of 66.67%. Resulting in taxable capital gain of $166,675.
Total Taxable Gain after June 25th, 2024 = $125,000+$166,675= $291,675
Mary - Applying the same calculation to Mary will result in total taxable capital gain of $291,675.
Applying their individual average tax rate of 25%, the tax liability for each individual would be $72,918.75 (25% of $291,675).
Therefore, the combined tax liability for both individuals would be $145,837.50.
In Conclusion - Under the new rules being implemented from June 25th, 2024, John and Mary will pay $20,837.50 more in taxes if the gains are realized with the new inclusion rate of 66.67%, after June 25th of 2024.
Consequently, understanding and planning for such tax implications are crucial for effective investment management, estate and financial planning, especially in scenarios involving substantial unrealized capital gains.
Please don't hesitate to reach out if you have any further questions regarding the new tax changes. Additionally, we'll be proactively reaching out to you to discuss any unrealized gains you have in your portfolio, prior to June 25th, of this year.
Your Creed Capital Management Team
Comments