To Realize or Not to Realize? Reminder of the June 25 Proposed Capital Gains Inclusion Rate Change

To Realize or Not to Realize? Reminder of the June 25 Proposed Capital Gains Inclusion Rate Change

On April 16, the Canadian federal government announced proposed changes to the inclusion rate for the calculation of capital gains tax and set a deadline of June 25, 2024 for the old rules to lapse. While there is no legislation in place yet to enforce it (and so some risk lingers about the final shape it may or may not take), with June 25 only a few weeks away we thought to share some perspective to aid in any decision-making you may be undertaking, alongside your tax advisor. They are the tax experts and you should rely on their experience! As part of those discussions, you may want to consider the following, and please see the list of resources below as well.

The proposed capital gains inclusion rate change may not apply to you (even if it goes through as drafted). One positive message we’ve been conveying to many clients is this tax rule may not apply to them just yet. While for corporations or trusts the higher inclusion rate of 66.7% applies to all gains, individuals have a $250,000 annual buffer before the higher rate applies – and not everyone will have more than $250,000 of gains to trigger. That may be due to portfolio size, a shorter tenure with us, or just due to normal turnover of the portfolio which has flushed out capital gains over time. Keep in mind capital gains tax only applies to taxable non-registered portfolios, and is not applicable for registered portfolios like RRSPs, RRIFs, TFSAs and RESPs. We are happy to work with you and your tax advisor to identify your capital gains position.

There exists an optimal breakeven point for triggering today versus deferring the gain. Paying the tax at a 50% inclusion rate today minimizes the tax rate you pay, but it also lowers your capital base, giving you less assets to compound going forward. If you don’t need to touch your portfolio for many years, you may end up with a larger post-tax portfolio by allowing the full amount to compound over time, and then paying the tax at the higher inclusion rate down the road. Separately, if you have shorter-term liquidity needs, it may be an opportune time to realize gains prior to June 25.

Donating appreciated securities in-kind to a Donor Advised Fund (DAF) or other charity can be a tax-effective strategy. If you are not subject to Alternative Minimum Tax (AMT)*, donating securities to charity can be done without triggering any capital gains tax liability – meaning the charity will get 100% of the market value and you will receive a tax deduction for the same amount. If you’ve been considering initiating or augmenting your philanthropic giving, this can be a way to keep your realized gains under the threshold. For more information on DAFs, see our most-recent Planning Matters article, here. Note that this particular strategy would not be subject to the same June 25 deadline as any donations made through December can be claimed in the 2024 tax year.

Portfolio turnover will impact capital gains and/or losses. As mentioned, the process of portfolio turnover naturally triggers capital gains every year. It makes sense if you think about it: the goal is to buy low and sell high – and it’s often prudent to trim the winners from time to time, especially if they’ve tipped over into ‘expensive’ territory. To put the risk into context, say your taxable portfolio has $1 million of unrealized capital gains and we assume that in any given year, 20% of those gains are realized (i.e., sold) then you would still fall under the $250,000 threshold for paying tax at the higher 66.7% inclusion rate in that year. Even if the portfolio triggered $300,000 of gains, you would only pay the higher rate on the last $50,000.

If you have a trust, there may be strategies available to shelter some gains. A quick reminder that we are not tax specialists so please check this with your tax advisor – but Manning Elliott writes in this article that “if trusts distribute their capital gains to individual beneficiaries, it appears the capital gains will be subject to the 50% inclusion rate so long as each beneficiary’s total capital gains for the year are $250,000 or less.”

It's not all about us. We’re aware your Leith Wheeler portfolio may be only one element of your overall financial picture, of which multiple parts may be subject to the new tax regime. Ensure your tax advisor is aware of your unrealized capital gains tax position for all investments, including any vacation or rental properties you may have.

If you think these proposed changes may apply to you, please engage your tax advisor – and us – sooner than later. If CRA’s proposed changes do impact you, your tax advisor will need time to develop a plan – and recall that every one of his/her high-net-worth clients will be scrambling for the same advice in these short few weeks leading up to June 25. Similarly, we want to achieve best execution for all our clients, so please be proactive in finalizing a plan and conveying your wishes ahead of the deadline.

Available resources. Here is a selection of publications from recognized accounting and legal firms to help with your research.

Implications of proposed changes to inclusion rate for capital gains:


Implications of Budget 2024 on charitable giving:

NOTE: The information contained herein should not be treated by readers as investment, tax, or legal advice, nor relied on as such. Please consult legal or tax professionals regarding your specific situation.

*CRA is contemplating changes to the AMT which may impact the capital gains shield and/or deductibility of the donation.