There’s a lot of buzz around Canada’s new capital gains tax inclusion rate, which came into effect on June 25, 2024. The new higher inclusion rate is aimed at wealthy Canadians who regularly realize substantial capital gains each year, but will also affect Canadians who plan to realize a one-time capital gain from things like selling the family cottage or vacation home, selling a rental income property, or selling investments held outside of registered accounts.
Tax expert Jamie Golombek, Managing Director of Tax & Estate Planning at CIBC Private Wealth, joins us for an in-depth conversation on the new higher capital gains inclusion rate, and what this change could mean for Canadians and their future financial decisions—including individuals, investors, and businesses or corporations. If you might be affected by the change, you’ll want to listen to this episode!
Here are three reasons why you should listen to this episode:
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Episode highlights
[02:40] Current rules vs. proposed changes
[04:40] “If we really want to break it down, what does this really mean for those who are affected? For individuals, it’s only gains over $250,000, and effectively your tax rate is going up by nine percentage points.”
[05:51] Who the changes will affect
[06:30] Individuals with a second home/cottage/vacation property
[09:10] Cottage owners
[12:11] Investors
[14:56] Corporations or businesses
[17:37] “I think that you really need to look at the value of deferral. If you’re not leaving at least $100,000 or more a year in the corporation, and you’re deferring tax on that, you have to question, is it worth paying that extra tax ultimately on the capital gain rather than having that investment done personally?”
[17:56] Will the capital gains inclusion rate ever go back down?
[19:18] “Ultimately it really is a political issue, and I think it will depend on who comes in, and the budget, and ultimately spending and how they can manage the deficit and also the long-term debt.”
[19:46] Tax planning tips
[21:10] “There’s so much to talk about, but you can’t do this alone. So, I think the best advice is to get advice. In other words, if you’re not confident with your own plan, reach out to your advisor. Whether it’s a financial advisor or a tax advisor, they will be able to go through some very basic strategies that will help you get on track and hopefully reduce the amount of tax that you pay.”
About Jamie Golombek
Jamie Golombek is the Managing Director of Tax & Estate Planning at CIBC Private Wealth, and is quoted frequently in the national media as an expert on taxation strategies for Canadians. He also writes a popular weekly column called “Tax Expert” in the National Post. Jamie teaches an MBA course in Personal Finance at the Schulich School of Business at Toronto’s York University in Toronto.
Connect with Jamie on his website, follow him on X, and check out his “Tax Expert” column.
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Carissa Lucreziano
Welcome to Smart Advice, a podcast connecting you with real financial advice, investment strategies and economic trends, empowering you with insights you need to make smart decisions about your money. I'm CIBC's financial advice expert, Carissa Lucreziano. Today, we’re talking about the impact of the recent changes to Canada’s capital gains inclusion rate and what this means for Canadians and their future financial decisions. This has been a hot topic and debate in the news since it was announced as part of the 2024 federal budget in April of this year.When you sell an asset for more than you originally paid for it, such as liquidate all or a portion of a non-registered investment portfolio or dispose of a rental property or the family cottage, a portion of those gains are taxed. Under the old rules if you purchased a property for 300k and sold it for 900k, only 50% of the gain, in this case $600,000 was taxable. But as of June 25th 2024, that changed. Individuals are still entitled to the 50% inclusion rate on the first $250,000 of capital gains. But for any capital gains over that $250,000, are now taxable at a rate of 66.67%. This change is aimed at wealthy Canadians who regularly as defined with the budget announcement, realize substantial capital gains each year. But the increase to the capital gains tax will affect all Canadians who realize a profit from the sale of their assets. The legislation also includes changes to capital gains taxes for corporations and trusts. There is so much to talk about with this topic so today I have brought in my colleague and tax expert Jamie Golombek. Jamie is the Managing Director of Tax & Estate Planning at CIBC Private Wealth and is quoted frequently in the media, providing his expert views on taxation strategies for Canadians. Jamie also writes a popular column called “Tax Expert” in the National Post. You can check it out weekly for a fresh perspective on tax topics. Jamie, it’s great to have you back for season two of the podcast.
Jamie Golombek
Thanks so much for having me back.
Carissa
I think more Canadians after this budget announcement need tax advice when navigating through financial decisions, to truly understand the impact of those decisions. And I know you're going to give us some of that perspective today.
Jamie
For sure, there's just so much to talk about, and I look forward to our conversation.
Carissa
So, let's get to the crux of what has changed. This news in the federal budget on the revision to the capital gains tax caught a lot of people by surprise and left many wondering how they can minimize their tax liability for the future. I mean, there was really only a two-month notice from April to the end of June when the new rules took place, not nearly enough time for some to make sound decisions, especially in the case of selling a rental or vacation property. You wrote in an article that highlighted this change as creating a frenzy of discussion, worry and anxiety. Should Canadians really be troubled by this increase to the capital gains tax? And how do you see this shaping and impacting future financial decisions?
Jamie
Well look, it's a big change, for sure, but it really only affects very few people each year. So, remember, for the average individual, for you to be affected by the increase in the inclusion rate: A) you have to have a capital gain outside of a registered plan like an RSP or a Tax-Free Savings Account. And B) your gain in a particular calendar year has to be over $250,000. So, look, there are very few people that have annual gains of $250,000 every year. However, it certainly is possible that if an individual were to sell their vacation property, they were to sell an income or rental property, the gain could be over $200,000 and in addition, it could also happen in the year of death. Because in the year of death, you're deemed to dispose of all of your property at fair market value. So absent tax-free rollover or transfer to your surviving spouse or partner, there could potentially be over $250,000 of gains in your final return, the return for the year of death, meaning that the estate would be liable for taxes. Now, if we really want to break it down, what does this really mean for those who are affected? Well, again, for individuals, it's only gains over $250,000 and effectively, your tax rate's going up by nine percentage points. So for example, if someone in Ontario at a 50% inclusion rate, at the top marginal rate of 53 and a half their tax rate on gains is about 26% than on gains over 250,000 that tax rate is now 35%. That's a 9% increase. The other group of people that should obviously pay attention is individuals who have corporations. This could be an operating company, a holding company, or even a professional corporation, which is often used by doctors, lawyers, accountants, realtors and other professionals for a variety of tax deferral opportunities. The gains in those corporations after June the 24th are now taxable at a two-thirds inclusion rate, there is no $250,000 break available to individuals with corporations that have corporately earned capital gains.
Carissa
Thanks for those examples and the difference between individuals and corporations, that's a big consideration. Now you mentioned most individuals you know may not have over that 250,000 but if you think about Canadians owning property because investment property, what have you, just over the last decade, even, could be sitting on substantial gains just based on the significant real estate appreciation that has occurred in the market. Regarding the new tax rules with capital gains like let's talk about how this will affect Canadians with various types of properties, like those who own a cottage, a vacation home, or investment property.
Jamie
Well I think that's really the biggest concern for individuals. Let's say you've got a property in the city and you also have a vacation home. So, when you sell one of them, you're going to have to choose whether or not it is your principal residence. So, in Canada, we have an unlimited principal residence exemption. There's no dollar limit associated with that. So, at the time of sale, you can choose which property is going to be designated the principal residence for the years of ownership. Now one option is if you have a very significant gain on your vacation property and a far less gain on your principal residence that you normally think of as a principal residence, like your home in the city, you might actually choose to use the principal residence exemption on the sale of your vacation property. Again, it depends on the total gains, but also the opportunity for future gain and holding period of the property that you're not selling. So ultimately, a couple of things to keep in mind. Number one, if a vacation property is jointly owned, which is very common if two spouses or partners buy the property together, then they co-own the property, typically 50/50, in which case, when the property is sold, the gain can also be split 5050. That means that each individual will be able to take advantage of the lower 50% inclusion rate on their first $250,000 of capital gains. Now that also applies to an income or rental property, if both spouses or partners contributed to the purchase of that property. The other thing that's important to keep in mind when we're talking about properties, whether it's a vacation property, or whether it's an income or rental property, is of course, making sure you track your capital expenditures, because your capital expenditures, things like major renovations, not repairs, but renovations that add to the value of that particular property can be added to your tax cost, or your adjusted cost base for tax purposes. And therefore, when you sell, your gain will be lower because your cost will be higher. So those are a couple of things to keep in mind for individuals that own property.
Carissa
Yeah, very important point. I don't know how clear that is to Canadians at large. This is new about even understanding that it is $250,000 per individual, if they, as you mentioned, contributed to the purchase of the home. So, lots to consider, but it's important to understand and to even have the opportunity to review, you know, what would be in one's best interest. So, we're on the cottage, vacation home, investment property topic. It's now cottage season and family cottages or vacation properties. It's always a hot topic when it comes to estate planning, and one of the fundamental purposes of planning for the transition of your estate to the next generation is to preserve as much wealth as possible. One of the ways to do that is to minimize as much taxes as possible, like upon the federal budget announcement, there's a lot of headlines in the media about uncertainty, anxiety amongst cottage owners over whether they should like rush out and sell their property before June 25. Now, I even heard you've mentioned in many you know, speaking engagements, how hard that would be. Now that we've passed the deadline, what option do cottage owners have to offset the increase in capital gains tax they may have to pay in the future?
Jamie
Well, I mean, obviously you can budget for it. So again, you know, you can estimate what the cost might let the proceeds of your fair value minus the cost, and you can put a budget. This is my tax. But one of the most interesting opportunities for some clients is the use of permanent life insurance. So, for example, if we know, and again, you don't need insurance for the fair value of the actual college. So, if you inherited a cottage years ago, and let's say 30 years ago, the cottage was $300,000 and now over the last 30 years, it's tripled. It's got up, let's say, to a million dollars. You don't need a million dollars of life insurance. The gain is $700,000 you don't even need $700,000 of insurance, because remember, on the $700,000 you're going to pay tax at a lower rate on the first 250 and then the rest of it, the other 450 of gain, we talk about the higher inclusion rate. So really, if you're thinking about sort of the amount of insurance you need on that $700,000 gain, maybe it's around $200,000 in, you know, with today's values. So again, this can be done very affordably. If you invest it, if you're in relatively good health and you're relatively young, this might be a great option. And the reason people buy the insurance is so that on death, the next generation if that's who the cottage or vacation home is being passed on to, can actually afford to keep it, because if they have to come up with the cash to now pay the tax inherent on that particular property, they might not be able to do so. And therefore, a lot of our clients are looking at the potential of using a life insurance policy, particularly if there's no other liquidity or cash in the estate to be able to fund that particular capital gains tax. Which has now, of course, gone up by 9% to the extent that the gain is over $250,000 per person.
Carissa
Yeah, great advice. I mean, like this is something that maybe families may not consider when they're, you know, starting to think about their estate plan is, if they want to leave property to their children, grandchildren's, beneficiaries, that those beneficiaries are responsible for that tax. How are they going to pay that? So we've talked a lot about property, but let's talk about how this new inclusion rate affects investors who have significant gains in their non-registered investment portfolios. For people that didn't crystallize gains before the inclusion rate went up, how can they focus on reducing the impact of paying more in capital gains taxes?
Jamie
Well, again, that's a question that we've been talking about a lot internally and with other advisors, and I think that we're going to have a new term starting in 2024 you know, at the end of the year, you and I often talk about tax loss selling which is the opportunity to crystallize a loss and then apply that capital loss against any other gains we had in the year, carry it back three years, perhaps to get a refund of capital gains tax paid in the prior three calendar years. Or maybe save that loss and carry it forward indefinitely to apply against future gains. I think for 2024 I predict that for 2024 the new term will be capital gains selling. And the reason I say that, of course, is because each individual will have $250,000 a year of capital gains that they can now realize at a 50% inclusion rate. So, in November, December, if we look at our portfolio and we say, are there some real winners here that ultimately we think we should take some profits? Because it is an opportunity then to crystallize those gains at $250,000 a year, take those profits. Now, in some cases, we may want to just take the profits and buy back the stock. Then it comes down to a time value of money, because you're essentially pre-paying the tax before you otherwise intended to sell. So again, this break-even analysis, we've done this in our report in terms of the capital gains break-even analysis. So very roughly, if your rate of return is 6% takes about eight years to break even, given the additional nine percentage points of tax. So again, that's a decision. But I think more importantly, you look at the broader portfolio allocation, you look at your various holdings, you speak to your advisor. Ultimately, you say, are there opportunities to crystallize again? Because if I do crystallize and maybe rebalance a portfolio before the end of the year, as long as we are under that $250,000 threshold, we're going to pay a preferred rate on those capital gains tax. And I think that's going to be a new discussion that we're going to start having in the end of 2024 along with, of course, tax loss selling. Maybe you combine some tax loss selling with the tax gains. Put them together, then only the difference above that would then be applicable, of course, to crystallize under $250,000.
Carissa
Yeah, thank you for that. It'll be interesting to see if that becomes the 250 becomes like the threshold on average that people kind of work within. So, let's talk a little bit about corporations and businesses. I know the capital gains. Tax affects corporations and trusts. How do you think this is really gonna affect small business owners? Does it make sense even to have an investment portfolio in a corporation, given the higher tax, because many of these small business owners, like you mentioned earlier, are doctors and dentists, and they could have investment holdings within their private corporations?
Jamie
Well, that's really a great question in terms of the future of corporations. I mean, many individuals, business owners, professionals, use corporations, whether they be operating companies or professional corporations, because of the substantial tax deferral that's available. For example, in the first $500,000 you pay a very low small business corporate rate on that tax, on that income, and then, of course, the rest of that money can be left in the corporation, is deferred until you take the money out. In some provinces, that deferral advantage is over 40%. The question then is, what do you do with the money that's in the corporation? If you're not putting it back into the business, you're investing it, and you're investing it, you're earning things like interest income, or maybe you're earning capital gains. And the problem is that there is a real cost to earn investment income in a corporation, a negative cost, otherwise, a rate that's higher than it would have been if you had earned it personally. And the trade-off for that, of course, is that you've got this, you know, massive deferral, but now you have a bigger problem. Because now if you earn capital gains, you don't get the $250,000 break of the lower threshold in the corporation. In other words, you would have been better off if you had realized those gains personally versus corporately. And again, we've crunched some numbers on that. I mean, that could be you're actually worse off by, you know, let's say 10 to 12% depending on the province. So in other words, you're really worse off than if you had earned that capital gain personally, because personally, you get a lower rate on the first 250 whereas corporately, you don't. And therefore, I think a lot of people will really need to consider, is it still worth it? What is the value of the deferral? Now for existing individuals, it's going to be hard to wrap it up, because if you take it out of the corporation, in most cases, you're going to have to pay tax as a dividend or a salary. But there may be some opportunities to, you know, maybe pay off a shareholder loan due to yourself, or perhaps pay out a capital dividend, which is tax free. But otherwise, I think the money is kind of stuck there, and you just, you know, you just sort of manage it. For new business owners, there's a lot of reasons people incorporate they do it for liability reasons, things like that. But the real concern is now, if you're building up an investment portfolio internally, you're really disadvantaged. So, I think that you really need to look at the value of deferral. I mean, if you're not leaving at least $100,000 or more a year in the corporation, and you're deferring tax on that, you got to sort of question, is it worth paying that extra tax, ultimately on the capital gain, rather than having that investment done personally?
Carissa
So, Jamie, Canadians have been accustomed to the capital gains inclusion rate being 50% it's been that way for over 20 years. Do you see this change as a shorter-term play? And even shorter term could be five years compared to the last 20 years. How do you see this going forward for Canadians?
Jamie
Well, this is the big question that people are wondering. And of course, as a political question. I'm not a political economist or anything. But look, at the end of the day, it will depend on what a future government does. I mean if, for example, the conservative party gets elected and they could potentially reduce the inclusion rate, would they do so right away? I'm not so sure, because again, there are revenues that are coming in based on this, and it's very hard to give up those revenues. We haven't had any public announcements so far. Obviously, I think they are looking at perhaps a tax review in the first number of days, if should they get elected, but, but they haven't promised anything on the capital gains. So, so look, I think long term, ultimately, if the government, or future government, can balance a budget and control spending, I think that they might lower the inclusion rate back again. I mean, if you look at, you know, competitiveness and where we are versus the US, the US has a 20% long term capital gains rate, so that's the all-in rate, not the inclusion rate and our rates are getting to be 36% so there's kind of a big difference there. So, I mean, ultimately, it really is a political issue, and I think it will depend on who comes in and the budget, and ultimately spending, and how they can manage the deficit and also the long-term debt. So yes, I do believe, personally, if I had to bet, that it will come down again, I'm not so sure it's going to happen right away on a new government. I think it may even come later in that term, even on a second term. So, we're not holding your breath on that one.
Carissa
No, not holding our breath. But hey, there is hope. Last thought, tax planning, as you and I know, and you know very, very well, is a really important component of one's overall financial picture. It should be considered and incorporated into your overall financial plan, and a tax advisor is an important professional alongside your financial advisor and other professionals when making decisions that have that financial impact, what are some longer-term tax planning strategies that Canadians should be considering? Where does somebody start when they want to start looking at the impact and tax planning? Any tips that you have for us?
Jamie
Well, again, I would just obviously sit down with your financial advisor, get some advice, if you can. I mean, or ultimately, of course, you can reach out to your tax advisor, your accountant. You want to make sure you're taking advantage of everything. You know, things from basic things like registered plans. Are we maximizing the RRSP? Are we doing the Tax-Free Savings Account? If we're a first time homebuyer are we taking advantage of the first home savings account? If we have children, are we doing the Registered Education Savings Plan with the grants? If there's someone in the family with a disability, a severe disability, are they getting the free grants and bonds on the registered disability savings plan? If you're retired, are you splitting your pension income? There's so many things you can do if you're making charitable gifts. Are you being strategic? How are you doing that? Are you donating appreciated securities and paying no capital gains tax? Are your wills up to date? Powers of Attorney? Like there's so much to talk about, but you can't do this alone. So, I think the best advice is to get advice. In other words, if you're not confident with your own plan, reach out to your advisor. Whether it's a financial advisor or a tax advisor, they'll be able to go through some very basic strategies that will sort of help you get on track and hopefully reduce the amount of tax that you pay.
Carissa
Wonderful, thank you for that great advice, and as always, so wonderful to have you here. Thank you for sharing your expertise and your insights and your tips with us today, Jamie.
Jamie
My pleasure. Thanks for having me.
Carissa
Thank you. You can find Jamie's tax expert columns in the National Post, and you can find his commentary and reports under tax planning tips on the CIBC Smart Advice hub. You can also visit jamiegolombek.com to find a collection of tax advice on various financial planning topics. Thank you for tuning in to this episode of Smart Advice. I'm Carissa Lucreziano to make sure you never miss an episode follow smart advice on your favorite podcast platform. For more financial tips, visit cibc.com/smartadvice.