Weekend Reading: Capital Gain Pain Edition

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:

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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!