Whether it’s a cottage or other real estate, there are ways to trigger capital gains without giving up control or use of your assets during your lifetime.Arpad Benedek/iStockPhoto / Getty Images
Crickets chirping is the only sound coming from the Department of Finance these days on the matter of the proposed capital-gains tax changes. We can only hope the proposed changes were just a bad joke because we haven’t seen legislation yet explaining how the rules will work, and the changes are supposed to be effective in less than three weeks – on June 25.
Assuming that the proposals will become law as the government has promised, what should Canadians do to prepare? Since we’re at the ninth hour and heading toward June 25, here are some ideas.
1. Corporate owners: The changes stand to impact those with corporations more than anyone else. Unlike individuals, corporations will face tax on two-thirds of all capital gains (there is no $250,000 threshold below which the 50-per-cent inclusion rate remains intact as with individuals). And this will impact the “capital dividend account” (CDA) of a corporation. The CDA is increased by the tax-free portion of capital gains realized, and this CDA balance can be paid out as tax-free capital dividends to shareholders. This amount will be significantly reduced starting June 25, 2024, when just one-third (the tax-free portion) of capital gains will be credited to the CDA. This will have a greater impact on taxes paid overall than the increase in income taxes to the corporation from the proposals.
If you own a corporation that is likely to dispose of an asset for a capital gain some time in the next several years, you should at least consider triggering the gain before June 25, 2024, to maximize your CDA. If you do maximize your CDA, consider paying tax-free capital dividends to yourself and reinvesting those dollars outside your corporation where capital gains will be taxed at slightly lower rates and where the first $250,000 of capital gains each year will be subject to the lower 50-per-cent inclusion rate.
2. Investors: If you have any securities that have appreciated in value and that you expect to dispose of in the next few years, consider selling them to realize the capital gain prior to June 25. It’s the settlement date, not trade date, that matters, so make sure settlement takes place prior to June 25. This is really a time-value-of-money decision. Would you prefer to pay tax at a lower rate for 2024, or at a higher rate in a future year? It depends on how far into the future you’re talking. Generally, if you plan to hold an investment for the following number of years or longer (and it differs based on your expected future returns), you shouldn’t bother triggering a capital gain before June 25: a return of 3 per cent is 15 years, 5 per cent is nine years, 6 per cent is eight years, 7 per cent is seven years, 8 per cent is six years, 9 per cent is five years and 10 per cent is four years.
Should you take advantage of a lower capital-gains inclusion rate?
3. Seniors: The older you are, the more sense it could make to trigger capital gains before June 25, particularly once you approach age 90. The reason is simply that it may not be that many more years before you’ll be deemed to have sold your assets at fair-market value upon passing away. When assets transfer to children or an individual other than your spouse, there could be tax to pay on a capital gain. Whether it’s a cottage, other real estate, marketable securities, or other assets, there are ways to trigger capital gains without giving up control or use of your assets during your lifetime.
Triggering a capital gain by June 25? Here are five ideas for what to do with that cash
4. Family members: Going forward, it could make sense to share ownership of assets so that the capital gain realized by each family member remains at or below $250,000 when an asset is sold. Speak to a trusted adviser about this first since you may give up control in this case, and you’ll want to avoid the attribution rules if your spouse is going to be an owner.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.