The federal government unveiled its 2024 federal budget with a proposed $53B in new spending over five years, including an ambitious $8.5B plan to tackle the housing crisis. The feds also proposed an increase to the capital gains inclusion rate, from 50% to 66% on gains in excess of $250,000 (personally) and from 50% to 66% on capital gains realized within a corporation or trust (no $250,000 threshold).

The proposed changes to the capital gains inclusion rate will apply to dispositions after June 24th, 2024.

A quick explanation on the inclusion rate: This does not mean a tax rate of 66% on capital gains. It means that two-thirds of a capital gain will be taxable as income. And only 50% of the first $250,000 of a gain will be taxable (for individuals).

For corporations and trusts, two-thirds of every $1 of capital gain will be taxable. This brings the taxation of capital gains closer in-line with dividends and interest.

A capital gain (or loss) is the difference between the original price paid and the price for which it was sold.

For individuals, this will mostly apply to second properties. If you bought a rental property or a cottage for $300,000 and then sold it for $600,000, you will have incurred a capital gain of $300,000:

• $250,000 of that gain will have the 50% inclusion rate applied – meaning $125,000 will be added to your income and taxable at your marginal tax rate.
• $50,000 of that gain will have the 66% inclusion rate applied – meaning an additional $33,000 will be added to your income and taxable at your marginal tax rate, for a total of $158,000 in taxable capital gains.

If you sold that property on or before June 24th you would have $150,000 in taxable capital gains rather than $158,000 in the proposed new inclusion rate. The difference in actual taxes paid for someone in the highest marginal tax bracket in Ontario would be $4,282.

Note that if you held that second property jointly with a spouse, each individual gets to apply the 50% inclusion rate to the first $250,000 of capital gains. That means a $300,000 capital gain on a property jointly held could be split $150,000 per spouse.

• $150,000 of that gain will have the 50% inclusion rate applied – meaning $75,000 will be added to each spouse’s income and taxable at their marginal tax rate.

No doubt there are many individuals wondering whether it makes sense to trigger the sale of a property prior to June 24th. If you’re one of them, make sure you assess your situation and know the adjusted cost base of your property (original price paid plus certain capital expenses) and current market value. 

Do you own the property individually, or jointly with a partner? Is the difference between the book value and market value under or over the $250,000 threshold? Do you have any capital losses that can be applied to offset some of the gains? Do you have RRSP contribution room that can be used to reduce your taxable income if you do trigger a gain?

Finally, how long were you planning to hold the asset (before these changes gave you pause)? Know that pre-paying tax now, even at a lower inclusion rate, might make you worse off in the long-run.

PWL Capital built a tool to test whether it makes sense to realize a gain now or defer it into the future.

It’s unlikely I will ever incur a personal capital gain (owning a second property sounds like my personal nightmare), but the proposed increase to the capital gains inclusion rate inside a corporation will impact me at some point in the future.

Up until now, my wife and I paid ourselves dividends and invested any retained earnings inside a corporate investment account. We did this because we already have considerable assets saved inside our RRSPs and a LIRA (and TFSAs, before we used them to top-up the downpayment on our new house). Building up a corporate investment portfolio gave us another tax shelter and more flexibility in how we pay ourselves in retirement.

Smarter people than me are still working out the details on optimal compensation and structure of investments after these changes take effect. It’s possible this is the impetus my wife and I needed to finally make the switch to salary (or some salary + dividends combo), but we’ll see.

I think it’s fairly clear that it makes sense to take larger personal withdrawals from the corporation to fill our TFSAs back up more quickly, rather than investing those extra dollars inside the corporation. We planned on doing that anyway, but may accelerate that plan.

This Week’s Recap:

In the last Weekend Reading I looked at the best time of year to retire and determined that the second quarter (April-May-June) might be the sweet spot. Thanks so much for the thoughtful responses on your own retirement decisions!

We’re still working on our mortgage switch with Pine Mortgage (that is to say, all of our documentation has been submitted and approved, and Pine is busy doing what they need to do to move the mortgage from TD before the end of the month.

From the archives: No, RRSPs are not a scam – a guide for the anti-RRSP crowd.

Promo of the Week:

The American Express Business Gold Rewards Card is still the top credit card on the market, giving you up to 75,000 Membership Rewards points when you spend $5,000 within three months.

Use this link to sign up for your own American Express Business Gold card and earn 75,000 Membership rewards points when you do the same. Then activate your player two for a chance to earn another 90,000 points (15k referral plus 75k welcome bonus).

If you’re looking for hotel rewards, this one is an absolute no-brainer card to have in your wallet. The Marriott Bonvoy Card gives you 55,000 bonus (Bonvoy) points when you spend $3,000 within the first three months. Not only that, you get an annual free night certificate to stay at a category five hotel (easily worth $300+), making this a card a keeper from year-to-year. The annual fee is just $120.

Weekend Reading:

PWL Capital’s Ben Felix shares a great explanation of the capital gains tax increasing and what it means for you:

Family doctors are one group unfairly swept up in the proposed changes to capital gains – here’s how the changes impact them.

Erica Alini lists the seven ways the 2024 federal budget affects your finances, from selling your cottage to RESPs (subscribers):

“The budget also proposes automatically opening an RESP for eligible children born in 2024 and later years starting in fiscal year 2029. This will ensure an additional 130,000 children will receive up to $2,000 through the Canada Learning Bond, which helps low-income families save for postsecondary education.

While the aid isn’t tied to contributions, families must have an account open to receive the funding.”

Some excellent thoughts on selling your business from advice-only planner Julia Chung.

Divorced parents are supposed to share kid costs fairly – but Anita Bruinsma explains why that’s often not the case.

Mark Walhout explains how to avoid tax surprises with CPP and OAS.

Don’t wait until the last minute to fill your cash bucket. Why you should take this simple step as you approach retirement. I like the idea of filling up your cash bucket with new contributions in your final working year (or two).

Finally, with Japanese stocks awake from their decades-long slumber, Of Dollars and Data blogger Nick Maggiulli explains why we invest for the decades, not the years.

Enjoy the rest of your weekend, everyone!

When is the best time of year to retire? For retirement projections 10-20 years out we might use a random date like your birthday, your pension’s normal retirement date, or the end of the year. Once you get closer to retirement, the details matter.

For instance, you might consider timing your retirement date just after bonuses are paid. Or matching up with your spouse’s retirement date. The weather can even play a role. Golfers don’t want to retire in December or January – might as well work until spring. Avid skiers might not mind as much.

Meanwhile, teachers might want to (or have to) wait until the end of the school year in June. Snowbirds, on the other hand, might relish the idea of spending their first few months of retirement in the winter down south.

I’ll admit I’ve never paid much attention to the best time of year for retiring, but lately a few soon-to-be retired clients have made that point – they don’t want to retire in the depths of winter, or they want to wait until a lucrative bonus gets paid out.

“Mike doesn’t want to retire on December 31st. The golf courses aren’t open yet. He’d rather wait until April.”

“Bonuses are paid out at the end of February, so I’ll stick it out until March.”

That’s why I think the second quarter (April – June) might be the sweet spot for calling it quits. Bonuses are paid, the weather has warmed up, and you’ve earned a bit of income for the year, but not so much as to drive your tax rate up too high.

I haven’t given much thought to my own retirement date, but I can absolutely see myself working through winter and into the spring months. I wouldn’t wait until my birthday (August), but April/May sounds about right.

Readers, did you choose your retirement date – and how did you decide? Was it weather, money, aligning the date with your spouse? Let me know in the comments.

This Week’s Recap:

In the last Weekend Reading I updated readers about our mortgage renewal and why we decided to go with a 3-year fixed rate term.

To update this saga, TD would not match the best rates I found elsewhere and so I put on my DIY mortgage broker hat to find the best deal. I had to hurry, too, because our term is coming up at the end of the month and switching can take time.

RBC has an excellent promotion, offering 5.09% plus paying $1,100 in switch fees, $1,000 cash back, and 55,000 Avion points. I was just about to sign this offer when a reader tipped me off on an even better deal.

Pine Mortgage was able to give us 4.94% for the 3-year term, plus $3,000 in cash back. They were fast, professional, and easy to deal with. The mortgage still has generous pre-payment privileges.

We signed the paperwork Friday and got the ball rolling so we can hopefully meet our end of month deadline.

Pine is relatively unknown, but has a partnership with Wealthsimple where they’ll give clients a discount (up to 0.25%) depending on the amount of assets held with Wealthsimple.

Since we are “Generation” clients ($500k in assets) we qualified for the 0.25% discount off of their published rate of 5.19%. Note that the initial online application gave us 5.19% but we were able to negotiate that down once a Pine representative reached out.

If you’re in the market for a mortgage (new house, refinance, or term renewal) send me a message and I’ll get you in touch with the Pine Mortgage rep that I used.

Weekend Reading:

The federal government unveiled a bold new strategy designed to tackle the housing crisis from both the supply and demand side. Part of the sweeping changes includes a boost to the Home Buyers’ Plan withdrawal limit (increasing from $35,000 to $60,000).

Despite high fees, Canadians remain perplexingly loyal to mutual funds (subscribers):

“It’s officially been a century since the advent of the mutual fund, which remains the investment of choice for millions of Canadians saving for retirement.

That loyalty comes with a steep cost. The premium fees that traditional mutual funds carry are silent portfolio-killers, devouring returns on a scale that Canadians still don’t seem to appreciate.

Even the average everyday investor will pay hundreds of thousands of dollars in fees over their lifetimes if they rely on mutual funds. The baffling part is that they do so voluntarily.”

Morningstar’s Christine Benz discusses three risks higher interest rates pose to your retirement plan.

Your spending drives your retirement plan. Meaning, if you’re nearing retirement it’s time to figure out where all of your money goes.

For the DINKs out there – How Canada’s child-free and cash-rich couples are spending their time and money.

PWL Capital’s Ben Felix has interviewed some of the smartest people in finance, economics, and psychology on the Rational Reminder podcast. Here’s some of the most important investing lessons he’s learned:

One of the biggest problems people have when it comes to money is figuring out what to do with it and when. Nick Maggiulli has you covered in his latest blog post.

Want to put money away for your kids or grandkids? Mark McGrath explains the unknown dangers of In-Trust-For Accounts.

Finally, Heather & Doug Boneparth explain why allowances are for kids – not your spouse.

Have a great weekend, everyone!

“When the facts change, I change my mind. What do you do, sir?” – John Maynard Keynes (maybe)

As a long-time mortgage holder, I’ve been adamant about a mortgage renewal strategy that goes something like this:

Go variable when the 5-year variable rate is offered at a steep discount off of prime rate (prime minus 1% or better), or else take a short-term fixed rate (1-2 year term) when the variable option is not attractive.

This approach meant holding a variable rate from 2011-2016, then taking a 2-year fixed rate from 2016-2018, and then back to variable from 2018-2023. This worked splendidly until about March 2022 when rates started to increase, and only really started getting hairy when the Bank of Canada hiked a full 1% in July 2022.

Nevertheless, we’ve done well with this approach – “winning” in 11 out of the last 12 years as far as I can tell.

We moved into our new house at this time last year and, amidst rising interest rates, elected to take a 1-year fixed rate mortgage term at 5.74%. This gave us a chance to hopefully see inflation come down in a meaningful way and open the door for the Bank of Canada to cut rates.

Turns out that was a bit premature, as rates aren’t expected to start falling until at least June or July. And, if inflation remains sticky in the high 2% / low 3% range, the Bank of Canada could certainly hold steady.

At the very least, BoC governor Tiff Macklem has already said that interest rates won’t decrease nearly at the same speed that they increased during the height of inflation.

That’s enough to give this personal finance blogger pause when it comes to betting on variable rates to win this term. Besides, the best variable rates on uninsured mortgages are pretty, pretty bad right now.

Rates would have to fall fast and hard for a variable term to outperform.

The trouble is, short-term (1-2 year) fixed rates aren’t much better.

That’s why I’m holding my nose this time and going with a 3-year fixed rate term. It’s the Goldilocks term – not too long in case rates do fall in a meaningful way, and not too short that we don’t get any meaningful rate relief now.

I found out through the grapevine that one of the big 5 banks is offering 3-year fixed rates at 4.99% so I’ve made that known to our mortgage lender and they’ve reached out to the powers that be to see if they can make it happen.

An interest rate of 4.99% is 0.75% better than our current rate. We’ll keep our payments the same, so we can make a bigger dent into the principal balance over the next three years.

This Week’s Recap:

In last week’s edition of Weekend Reading I shared some tips for investing in an asset allocation ETF.

From the archives: Why it would be ludicrous to invest in these model portfolios.

And for those of you filing taxes this month, here’s the difference between tax deductions and tax credits.

Promo of the Week:

We activated player two for our rewards cards strategy, meaning earlier this year I signed up for the American Express Business Gold card, hit the minimum spend target to reach the welcome bonus, and then referred my wife (player two) to get the same card in her name. 

The result is 15,000 additional Membership Rewards points for me for the referral, and now my wife has a chance to earn 75,000 Membership Rewards points after spending $5,000 in the first three months.

Use this link to sign up for your own American Express Business Gold card and earn 75,000 Membership rewards points when you do the same. Then activate your player two for a chance to earn another 90,000 points (15k referral plus 75k welcome bonus).

If you’re looking for hotel rewards, this one is an absolute no-brainer card to have in your wallet. The Marriott Bonvoy Card gives you 55,000 bonus (Bonvoy) points when you spend $3,000 within the first three months. Not only that, you get an annual free night certificate to stay at a category five hotel (easily worth $300+), making this a card a keeper from year-to-year. The annual fee is just $120.

We used our free night to stay in the Calgary Marriott Airport in-terminal hotel the night prior to an early flight departure. Nothing beats walking out of the hotel lobby and right to your gate without stepping foot outside! We’ll do it again in London later this year before flying home from Heathrow in October.

Again, refer your spouse or partner and do it all over again to earn another 55,000 Bonvoy points, plus 20,000 referral points, and another free night certificate.

Weekend Reading:

Why Andrew Hallam doesn’t regret selling his Berkshire Hathaway shares, even though they’d be worth almost $2M today.

Of Dollars and Data blogger Nick Maggiulli explains why someone’s current financial standing or background should hold much weight when determining whether their advice is useful:

“Just because someone is rich doesn’t imply that they know how they got rich. The same goes for someone who was “poor” and then became rich. After all, you could’ve gotten rich in a different way than what you claim publicly.”

You should subscribe to the FP Collective, a new website aimed at helping Canadians cut through the noise and find trustworthy financial information. The first post by Cameron Smith debunks investment myths to explain what you really need to know about expected returns.

Here’s PWL Capital’s Ben Felix on why bank financial advice is worse than people realize:

Morningstar’s Christine Benz shares why index funds and ETFs are good for retirees due to low costs, tax efficiency, ease of oversight, and cash flow extraction.

Another FP Collective banger, this time it’s advice-only planner Julia Chung explaining what to think about when it comes to passing down the family cottage:

“You may find that there are just a few people who really want to keep the property. Or perhaps there are none and it’s time for you to sell. Or perhaps everyone wants in. If more than one person definitely wants to maintain the property, then you know it’s time for a family meeting.”

Recent retiree Jeffrey Actor and his wife were shy to admit that their international travel bucket was relatively empty, and they had embarrassingly few stories to share. The question they asked themselves was – if not now, when?

People like to complain about CPP, but it is one of the most valuable retirement assets available to Canadians:

Morningstar’s latest study on balanced funds shows that Canadian investors have been steadily selling commission-based funds for balanced ETF versions. Well done!

Finally, The Loonie Doctor Mark Soth says that investors are prone to fear, overconfidence, and other forms of expensive self-talk.

Have a great weekend, everyone!