Act Now: How the 2024 Capital Gains Tax Hike Could Impact Your Wealth & What You Can Do About It

Introduction: Preparing for the 2024 Tax Changes in Canada

The 2024 federal budget has introduced a pivotal shift for taxpayers across Canada with the proposal to increase the capital gains inclusion rate from 50% to 66.67%. This significant adjustment prompts a reevaluation of financial strategies for both individuals and corporations, emphasizing the critical role of tax efficiency in wealth accumulation. As we approach the potential June 25, 2024, effective date, understanding the implications of this change and planning accordingly is paramount.

This discussion aims to provide a clear outline of the proposed changes, explore the strategic responses you might consider, and highlight how these shifts could impact on your financial landscape. Although the budget has generally described the modifications to capital gains taxation, many details remain under wraps without draft tax legislation. This creates a level of uncertainty regarding how these changes will be implemented and interpreted.

Given these unfolding developments, it is essential to stay informed and agile, ready to adapt your financial and tax planning strategies as new information becomes available. If you would like to engage our firm for pre-June 25^th transactions, we emphasize doing so quickly as we will only accept a limited number of clients due to capacity.

We are tax professionals who can provide up-to-date guidance and help prepare for these changes. Engaging with experts like Shajani CPA ensures that you are not only compliant but also positioned to optimize your financial outcomes considering the evolving tax landscape. This article will guide you through what is known about the changes, potential strategies to consider now, and how to plan effectively for the future.

Section 1: Understanding the Federal Budget Process

Navigating the intricacies of the federal budget process is crucial for individuals and corporations, particularly when it involves significant changes such as the proposed increase in the capital gains inclusion rate. This section outlines the step-by-step process that the 2024 Federal Budget will undergo before its provisions affect your tax planning.

1. Initiation of the Budget Process

The budget process begins with the Minister of Finance presenting a ways and means motion in the House of Commons. This motion is a formal request for approval of the government’s budgetary policy in general terms. It sets the stage for the detailed legislative process that follows but does not yet authorize any changes in taxation or government spending.

2. Debate and Amendments

Following the presentation of the ways and means motion, the House of Commons engages in up to four days of debate. This period is crucial as it provides an opportunity for opposition parties to critique the government’s proposals and suggest amendments or sub-amendments to the budgetary policy. These discussions are pivotal as they shape the public and parliamentary response to the budget.

3. Voting on the Motion

After the debate, a vote is taken on the Minister of Finance’s motion. Approval of this motion by the House signifies a general consensus on the government’s financial strategy, though it does not grant immediate authority to alter tax laws or expend funds. This vote is essentially a preliminary endorsement of the budget’s direction.

4. Legislative Approval and Implementation

If the ways and means motion passes, the next step involves the drafting and introduction of a budget implementation bill. This bill contains the specific legal changes required to enact the budget’s proposals, including any adjustments to taxes. For the bill to become law, it must be passed by both the House of Commons and the Senate and then receive royal assent.

5. Monitoring Progress

The process is transparent and can be monitored by the public. Key dates for the 2024 budget debates were set for April 18, with subsequent sessions on April 29, 30, and May 1. The progress of the budget implementation bill and other related parliamentary activities are available for viewing on the Parliament of Canada’s website at www.ourcommons.ca.

By understanding these steps, stakeholders can better anticipate how changes proposed in the Federal Budget, such as the increase in the capital gains inclusion rate, will progress through the legislative framework and impact their financial planning and tax strategies. This knowledge not only prepares you for the potential financial implications but also equips you with the information necessary to consult effectively with your tax professionals.

Section 2: History and Evolution of the Capital Gains Inclusion Rate

Understanding the historical context and evolution of the capital gains inclusion rate is essential for anyone involved in investment and tax planning. The capital gains inclusion rate determines the portion of a capital gain that is taxable. A capital gain occurs when you sell, or are considered to have sold, a capital property for more than its adjusted cost base (ACB) plus any outlays and expenses incurred during the sale. Here we explore the changes to this rate over time and the implications of these changes.

Definition of Capital Gains and Taxable Capital Gains

Capital gains are treated preferentially in the tax system, with only a portion of the gain being taxable. The fraction of the gain that is taxable is determined by the capital gains inclusion rate. The portion that is taxed, known as a taxable capital gain, is included in an individual’s or corporation’s taxable income.

Historical Overview of the Capital Gains Inclusion Rate

• 1972 to 1987: Capital gains tax was introduced in Canada in 1972. Initially, the inclusion rate was set at 50%, meaning half of the capital gain was taxable.
• 1988 to 1989: The inclusion rate was increased to 66.67%, reflecting a shift towards higher tax responsibilities on capital gains.
• 1990 to February 27, 2000: The rate saw another increase to 75%, marking the highest burden on capital gains in Canadian history.
• February 28 to October 17, 2000: The rate was briefly reduced back to 66.67%.
• After October 17, 2000: The inclusion rate was reduced to 50% again, where it has remained stable until the recent proposal.

 

Impact of the Proposed Changes

The proposed increase to the inclusion rate, scheduled to take effect on or after June 25, 2024, would restore the rate to 66.67%. This adjustment represents a significant shift in tax policy, especially for high-value transactions. Specifically, for capital gains exceeding $250,000 at the top marginal tax rate, the average federal-provincial marginal tax rate on capital gains would effectively increase from 25.3% to 33.8%. This change underscores the government’s approach to increasing tax revenues from higher-value gains while affecting investment decision-making and tax planning strategies.

Implications for Tax Planning

The fluctuating history of the capital gains inclusion rate has profound implications for financial planning and investment strategies. Taxpayers, especially those with substantial investment portfolios or interests in family-owned enterprises, need to be vigilant about these changes. Strategic decisions, such as the timing of asset sales or realizations of gains and losses, must be carefully planned considering the current and proposed tax frameworks.

Understanding the historical trajectory and potential future changes in the capital gains inclusion rate enables better preparation and adaptability to evolve tax environments. Taxpayers must stay informed and consult with tax professionals to navigate these changes effectively, ensuring that their financial and tax planning strategies are both compliant and optimized for their specific situations.

 

Section 3: Implications of the Proposed Increase in Capital Gains Inclusion Rate

The proposed changes to the capital gains inclusion rate in the Federal Budget 2024 present significant implications for different entities, including individuals, corporations, and trusts. Here, we break down the effects of these changes across these groups to aid in strategic planning and understanding.

Effects on Individuals

Timing of Gains and Thresholds

For individuals, capital gains realized before June 25, 2024, will be taxed at a 50% inclusion rate. After this key date, the first $250,000 of capital gains each year will continue to be taxed at this rate, while any gains exceeding $250,000 will face a higher rate of 66.67%. This introduces a significant planning consideration for individuals who anticipate realizing substantial capital gains shortly. The implementation of this tiered rate structure encourages strategic timing of asset sales, especially for those with diverse portfolios that might generate large gains.

Impact on Marginal Tax Rates

With the introduction of the new inclusion rates, the average federal-provincial marginal tax rate on capital gains exceeding $250,000 will rise to 33.8%, up from the previous rate of 25.3%. This increase represents a notable jump in tax obligations for high-income earners and underscores the importance of sophisticated tax planning to manage this change effectively.

Considerations for Employee Stock Options

Under the new budget, the treatment of employee stock options will be adjusted to reflect the updated capital gains inclusion rates, reducing the stock option deduction from 50% to 33.33% of the taxable benefit. This change means that if an individual’s combined income from capital gains and employee stock options exceeds $250,000, the excess will be taxed at the new higher rate. This alteration in tax treatment necessitates a review of compensation strategies for employees holding substantial stock options, particularly in high-growth sectors.

Addressing Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) is designed to ensure that individuals benefiting significantly from deductions and tax preferences pay at least a minimum amount of tax. With the new budget, realizing large capital gains could more frequently trigger AMT due to increased taxable income. However, the increase in the capital gains inclusion rate might partially offset this effect, as higher regular taxes could be credited against AMT liabilities. It is vital for taxpayers to evaluate their potential exposure to AMT in advance and plan their transactions to minimize its impact, possibly spreading out gains or exploring other tax relief options.

 

Effects on Corporations

Uniform Inclusion Rate

For corporations, a uniform 66.67% inclusion rate on all capital gains will apply starting June 25, 2024, irrespective of the total amount realized. This rate is consistent across various types of corporations, such as operating, holding, and professional corporations. The new rate significantly increases the tax burden on corporate-held assets, impacting their financial planning and the strategic management of their capital assets.

Disruption in Tax Integration

The principle of tax integration, which is fundamental to the Canadian tax system, aims to ensure that the total tax paid on income is roughly the same whether it is earned through a corporation or personally. However, the increase to a uniform 66.67% inclusion rate for corporations disrupts this balance, leading to a potential disadvantage when assets are held and realized within a corporate structure rather than held personally. This shift could result in a higher cumulative tax burden when income is earned and then distributed from a corporation, thereby penalizing small businesses that have traditionally used their corporations as a vehicle for retirement planning.

Planning Implications and Shajani CPA’s Role

This disruption in tax integration calls for a reevaluation of how corporations manage and plan for their capital gains. It may now be less advantageous to hold certain investments within a corporation due to the increased tax burden on realized gains. This change poses a particular challenge to small business owners who must adapt to these new tax structures while still aiming to optimize their retirement planning.

Shajani CPA can provide crucial guidance during this transition. With specialized expertise in corporate tax planning, Shajani CPA can offer strategic reorganization strategies to minimize the tax impact of these changes. By restructuring investment portfolios, timing the realization of gains, and possibly utilizing different forms of income sprinkling or dividend distribution, corporations can better manage their tax liabilities. Additionally, Shajani CPA can assist businesses in exploring new tax planning opportunities that align with the revised rules, ensuring that businesses can continue to thrive under the new tax regime.

 

Effects on Trusts

No Threshold Benefit

Trusts will face a uniform 66.67% inclusion rate on all capital gains realized on or after June 25, 2024, without the benefit of the $250,000 threshold that individuals enjoy. This rate affects various trust structures, including estate, life interest, and disability trusts, placing a heavier tax burden on gains realized within these entities.

Trust Distribution Strategies

Trustees are tasked with navigating these changes by carefully considering the distribution of capital gains. Strategic distributions can allow beneficiaries to take advantage of the lower 50% inclusion rate applicable to the first $250,000 of individual capital gains. This approach requires aligning the distribution with the trust’s objectives and the original intentions of the settlor, ensuring that the distributions are not only tax-efficient but also fulfill the purpose of the trust.

Planning for Future Legislation

With the landscape of trust taxation undergoing significant changes, trustees and advisors must remain vigilant and responsive to any legislative updates that might affect the taxation of distributed gains. The timing of these distributions and their alignment with potential legislative adjustments will be crucial in managing the financial impact on trusts and their beneficiaries.

Shajani CPA’s Role in Enhancing Trust Strategies

In response to these challenges, Shajani CPA offers specialized planning strategies that can help trusts reclaim some advantages lost due to the new tax rules. By employing sophisticated tax planning and restructuring techniques, Shajani CPA can assist trustees in optimizing the tax positions of the trusts they manage. This might include timing strategies for realizing gains, using specific types of trust structures that offer better tax treatment, or re-aligning investments within the trusts to better suit the new tax realities.

Moreover, Shajani CPA can guide how trusts can best utilize their ability to distribute gains to beneficiaries, potentially allowing for more favorable tax treatment under individual tax thresholds. By integrating these strategies, trusts can not only comply with the new regulations but also potentially enhance the financial outcomes for both the trusts and their beneficiaries, ensuring that they continue to serve as effective vehicles for managing and preserving wealth.

 

Section 4: Corporate Considerations in Estate Tax Planning

Overview of Estate Planning with Corporate Assets

In Canada, corporate assets are subject to specific rules upon the death of a shareholder, particularly under the deemed disposition rules. These rules assume that all capital property owned by the deceased was sold immediately prior to death, triggering a capital gain or loss based on the fair market value (FMV) of those assets at that time. This can lead to significant tax implications for the estate and its beneficiaries, especially with the upcoming changes in capital gains inclusion rates.

Accessing the Lifetime Capital Gains Exemption (LCGE)

One crucial aspect of tax planning for corporate assets involves the Lifetime Capital Gains Exemption (LCGE), which as of now stands at $1,250,000. This exemption applies to the sale of qualified small business corporation shares, significantly reducing the capital gains tax liability. However, it’s important to note that the LCGE is not available to investment companies or non-active businesses that primarily generate passive income. This limitation necessitates strategic planning to ensure that corporations qualify for the LCGE at the time of the shareholder’s death.

Reorganizations for Optimizing LCGE

Reorganization strategies can be crucial for aligning a corporation’s structure with the qualifications for LCGE. These may involve restructuring the corporation’s activities to meet the necessary criteria of an active business rather than one that primarily earns passive income. Such reorganizations can be complex and require detailed planning and timing to ensure compliance with tax laws while optimizing tax benefits.

Shajani CPA’s Role in Corporate Estate Planning

Shajani CPA offers expert reorganization services to assist businesses in minimizing the impact of the new capital gains inclusion rates and maximizing the use of LCGE. By analyzing the current corporate structure and its activities, Shajani CPA can provide tailored advice and implementation strategies that ensure the corporation is positioned to take full advantage of available tax exemptions and minimize exposure to increased capital gains taxes.

Considerations for Dealing with Double Taxation

Upon the death of a shareholder, not only are the shares of the corporation considered disposed of, but there is also a potential for double taxation when beneficiaries eventually withdraw funds from the corporation. The estate may face capital gains taxes and, subsequently, taxes on the withdrawal of funds. Strategic use of the Refundable Dividend Tax on Hand (RDTOH) and the Capital Dividend Account (CDA) can mitigate these effects. These accounts allow for tax-efficient distribution of funds from the corporation to the beneficiaries, reducing the overall tax burden.

Planning for Liquidity

It’s crucial to assess whether the estate will have sufficient liquidity to cover the tax obligations arising from the deemed disposition of corporate shares. Life insurance policies are a common strategy to provide the necessary funds to cover these taxes, ensuring that the corporation can continue operating without needing to liquidate assets to pay taxes.

Corporate considerations in estate tax planning require a nuanced understanding of tax laws, particularly with the upcoming changes to capital gains inclusion rates. Strategic use of reorganizations and other planning techniques is essential to minimize tax liabilities and ensure the smooth transfer of corporate assets. Shajani CPA is equipped to guide businesses through these complexities, offering solutions that align with both current and future tax regulations.

Section 5: Impact on Special Circumstances

Effects on Those Who Previously Claimed a Capital Gains Reserve

When selling capital property, it is not uncommon to receive payment over a period rather than immediately at the time of sale. The capital gains reserve is a mechanism that allows sellers to defer the recognition of a portion of the capital gain over time. Typically, the gain must be included in income gradually over up to five years, with a minimum of 20% of the gain being reported each year. For farm property or qualified small business shares transferred to a child, a longer period of up to ten years is allowed.

This strategy has been advantageous for business owners who, for example, have sold their businesses and accepted vendor take-back financing, allowing them to spread the tax impact over several years. However, with the proposed increase in the capital gains inclusion rate from 50% to 66.67% after June 25, 2024, there is uncertainty regarding the rate at which previously claimed reserves will need to be included in income. If these reserves are brought into income after the increase, they will be subject to a higher rate, significantly impacting the seller’s tax liability.

The determination of the inclusion rate for these reserves will also affect the calculation and timing of the Capital Dividend Account (CDA) and capital dividends, which are critical for tax planning. Detailed guidance is awaited in the upcoming legislation to clarify these aspects.

The Effects of Becoming a Non-Resident of Canada

Another significant area of concern is for individuals who cease Canadian residency. According to Canadian tax rules, becoming a non-resident triggers a deemed disposition of all worldwide property at its fair market value (FMV), known as “departure tax.” This rule captures any unrealized gains accrued while the individual was a resident of Canada.

The property includes securities in non-registered investment portfolios, real estate located outside Canada, shares of Canadian private corporations, and partnership interests. The resulting tax liability from this deemed disposition ensures that Canada taxes any capital gains accrued during the individual’s period of residency.

Under the new rules, individuals ceasing Canadian residency could face an increased burden due to the heightened capital gains inclusion rate, especially if significant gains are involved. Furthermore, the Alternative Minimum Tax (AMT), which is designed to ensure high-income earners pay a minimum level of tax, could pose an additional challenge. While AMT is typically a temporary tax, it becomes a permanent obligation for those subject to departure tax.

Shajani CPA’s Expertise

In navigating these complex scenarios, Shajani CPA can offer expert advice and planning strategies. For those with capital gains reserves, Shajani CPA can provide insights on the optimal timing and strategies to manage the inclusion of these reserves under the new tax rates. Additionally, for individuals planning to cease Canadian residency, Shajani CPA can assist in strategic planning to minimize the impact of departure tax and manage the implications of AMT effectively. These tailored strategies ensure that transitions in personal or business circumstances are handled with a clear understanding of the tax implications and opportunities under the new legislative framework.

 

Section 6: Strategic Considerations Before Taking Tax Actions

The Value of Tax Deferral

Understanding the power of tax deferral is crucial in tax planning. Deferring tax leverages the time value of money, meaning the longer your tax is deferred, the less the present value of your future tax liability becomes. For instance, $25,000 in tax deferred for 20 years at an assumed 5% interest rate has a present value of only $9,422. Keeping money invested rather than paying it out in taxes immediately allows for greater potential growth and benefits from compounding. Selling assets now might mean pre-paying taxes and having a smaller amount to reinvest, which could impact long-term financial growth.

Revisiting Goals and Timelines

Before making any significant decisions that could affect your tax situation, it’s important to revisit your overall financial goals and timelines. While all Canadians operate under the same set of tax rules, the optimal strategy for each individual can vary greatly depending on their unique circumstances. Here are some “big picture” questions to consider:

Time Horizon

• Investment Time Horizon: Has there been any change to my investment time horizon that should prompt a reassessment of my current strategy?
• Life Expectancy: Has my life expectancy changed, perhaps due to health issues, which could influence decisions on the timing of gains or losses?
• Age Considerations: Is advanced age a factor in minimizing potential estate tax implications?

 

Rebalancing

• Goals Alignment: Are my financial goals the same as when I initially constructed my portfolio?
• Risk Tolerance: Is my portfolio still aligned with my current risk tolerance?
• Diversification: Does my portfolio maintain an appropriate level of diversification to safeguard against market volatility and sector-specific risks?

 

Liquidity and Cash Flow

• Immediate Needs: Do I have upcoming expenses or financial commitments that require liquidating assets?
• Financial Health: What is my current financial picture, and how will selling assets impact my liquidity?

 

Financial Picture

• Capital Gains Threshold: Am I likely to realize net capital gains over $250,000 this year?
• Taxable Income Levels: Will my overall taxable income be lower or higher this year, and how might that affect the benefits of selling now versus later?
• Tax Brackets: Can I take advantage of lower marginal tax rates this year through strategic asset sales?

 

Lifestyle Changes

Relocation Plans: Do I have plans to move out of Canada, and if so, how will that affect my tax situation?

Shajani CPA’s Role in Strategic Tax Planning

In light of these considerations, Shajani CPA can provide invaluable assistance. We offer personalized advice that aligns with your specific financial goals and tax planning needs. Our expertise can help you understand and navigate the complexities of tax planning, ensuring that you make informed decisions that optimize your tax position and support your long-term financial health. Whether you’re considering the sale of assets, rebalancing your portfolio, or planning for future life changes, Shajani CPA can guide you through the process with strategic insights and tailored solutions.

 

Section 7: Break-even Analysis Example for Individual Investors and Corporations

Understanding the timing of asset sales under new tax regulations is crucial for effective tax planning. This section provides detailed examples of break-even analysis for individuals and corporations, considering the upcoming increase in the capital gains inclusion rate from 50% to 66.67% after June 25, 2024.

Break-even Analysis for Individual Investors

Consider an individual investor contemplating whether to sell a security before the increase in the capital gains inclusion rate. The investor must decide if selling now or continuing to hold the asset yields a more favorable tax outcome based on expected investment growth and future tax rates.

Assumptions:

• Fair Market Value (FMV) of securities: $500,000
• Adjusted Cost Base (ACB) of securities: $200,000
• Marginal Tax Rate: 45%
• Expected Annual Rate of Return: 7%

 

Scenario 1: Sell Now at 50% Inclusion Rate

• Capital Gain: $500,000 – $200,000 = $300,000
• Taxable Gain at 50% Inclusion: $150,000
• Tax Payable: $150,000 * 45% = $67,500
• After-tax Proceeds: $500,000 – $67,500 = $432,500

 

Scenario 2: Hold and Sell at Future Date at 66.67% Inclusion Rate

• Expected Growth for 5 Years at 7% p.a.: $500,000 * (1 + 0.07)^5 = $701,275
• Future Capital Gain: $701,275 – $200,000 = $501,275
• Taxable Gain at 66.67% Inclusion: $334,183
• Tax Payable: $334,183 * 45% = $150,382
• After-tax Value: $701,275 – $150,382 = $550,893

 

Break-even Analysis: If the investor sells now, they will have $432,500 to reinvest. If they hold for 5 years, the after-tax value of the investment would be $550,893, demonstrating that holding the investment, in this case, yields a higher after-tax return despite the higher inclusion rate due to compound growth outpacing the tax impact.

Break-even Analysis for Corporations

Corporations also face decisions regarding the timing of asset sales, especially when considering the reinvestment of proceeds within the corporate structure or eventual distribution to shareholders.

Assumptions:

• FMV of corporate-held securities: $1,000,000
• ACB of securities: $400,000
• Corporate Tax Rate on Capital Gains: 50%
• Shareholder’s Tax Rate on Dividends: 30%
• Expected Annual Rate of Return: 5%

 

Scenario 1: Sell Now at 50% Inclusion Rate

• Capital Gain: $1,000,000 – $400,000 = $600,000
• Taxable Gain at 50% Inclusion: $300,000
• Corporate Tax Payable: $300,000 * 50% = $150,000
• After-tax Proceeds: $1,000,000 – $150,000 = $850,000

 

Scenario 2: Hold and Sell at Future Date at 66.67% Inclusion Rate

• Expected Growth for 5 Years at 5% p.a.: $1,000,000 * (1 + 0.05)^5 = $1,276,282
• Future Capital Gain: $1,276,282 – $400,000 = $876,282
• Taxable Gain at 66.67% Inclusion: $584,188
• Corporate Tax Payable: $584,188 * 50% = $292,094
• After-tax Value: $1,276,282 – $292,094 = $984,188

 

Break-even Analysis: For the corporation, selling now results in $850,000 to reinvest, while holding the asset for 5 years results in an after-tax value of $984,188. Despite a higher tax rate later, the benefit of tax deferral and compound growth means the corporation should consider holding the asset longer.

These examples highlight the importance of assessing the timing of capital gains realization, especially in the context of changing tax rates. By calculating break-even points and considering growth potential versus tax costs, investors and corporations can make more informed decisions aligned with their financial strategies.

Section 8: Utilizing Corporations and Trusts for Advanced Tax Planning and Retirement Strategies

As we navigate the complexities introduced by the proposed increase in the capital gains inclusion rate, effective strategies leveraging corporations and trusts become essential. This section explores several key strategies, including utilizing the Capital Dividend Account (CDA), permanent life insurance, Individual Pension Plans (IPPs), and considerations for real estate investments, to optimize tax and retirement planning.

Capital Dividend Account (CDA) Usage

The CDA is a notional account that allows private corporations to distribute tax-free dividends to shareholders, derived from the non-taxable portion of net capital gains. With the upcoming changes, a capital gain realized before June 25, 2024, contributes 50% to the CDA, whereas post-change, only 33.33% will contribute, given the higher inclusion rate. This shift necessitates careful timing of capital gains realization and potential dividend distribution to maximize the CDA benefits before more stringent conditions take effect.

Permanent Life Insurance as a Corporate Investment

Permanent life insurance within a corporation offers a dual benefit: it provides a death benefit that is generally tax-free and can significantly enhance the CDA of a corporation, enabling larger tax-free dividends to shareholders. This is particularly beneficial in retirement planning, where life insurance can be structured to fund buy-sell agreements or provide liquidity for estate taxes, thereby preserving the value of the business or estate for future generations.

Example: A corporation purchases a permanent life insurance policy on the life of a key executive. At the executive’s passing, the corporation receives a $1 million death benefit, where $200,000 exceeds the policy’s ACB. This excess $200,000 can flow through the CDA and be distributed as a tax-free dividend to shareholders, potentially the deceased’s family, thus providing them with immediate liquidity without additional tax burden.

Individual Pension Plans (IPPs)

IPPs are an excellent tool for business owners and incorporated professionals. These registered pension plans allow for higher contribution limits compared to RRSPs, especially for those over 40, aligning well with the needs of high-earning individuals who wish to defer large amounts of tax until retirement.

Example: An incorporated professional sets up an IPP at age 45, allowing for significantly higher tax-deductible contributions than an RRSP. By age 65, the IPP could provide a more substantial pension benefit, funded by the corporation at higher contribution limits, facilitating a stable retirement income stream while reducing the individual’s tax liability during high-earning years.

Considerations for Vacation and Investment Properties

Holding real estate, whether vacation or investment properties, within a corporation or trust can be strategic but requires careful planning due to the implications of personal use properties and potential rental income.

Vacation Property: If held within a trust, the property can be transferred to beneficiaries under specific conditions, potentially using a trust to manage and control how and when the property is passed along, avoiding probate and providing tax-efficient transfer.

Investment Property: Holding investment properties in a corporation can defer taxes on rental income at the corporate rate, which might be lower than personal income tax rates, depending on the province. Additionally, structuring the sale of such properties can leverage the CDA for tax-effective distribution of proceeds.

Example: A family trust holds a vacation home valued at $500,000 with an ACB of $300,000. The trust structure allows for a planned distribution to beneficiaries, who may use their personal LCGE to shelter some or all of the capital gains, assuming proper usage and qualification as a principal residence.

Strategy Integration and Holistic Planning

Integrating these strategies requires a holistic approach to personal and corporate finances, ensuring that all actions are aligned with the individual’s or family’s overall financial goals and tax situation. Strategies like utilizing the CDA, investing in permanent life insurance, and setting up IPPs should be coordinated with other financial elements such as estate planning, succession planning, and the management of investment or real estate holdings.

By leveraging these sophisticated strategies, individuals and corporations can navigate the complexities of the tax system, optimize their financial outcomes, and ensure a robust plan for retirement and estate planning.

 

Section 9: Summary of Tax Rates for Individuals and Corporations in 2024

This section summarizes the top marginal tax rates for both individuals and corporations in Canada for the year 2024, focusing on capital gains and dividends. These rates are crucial for planning and optimizing tax strategies under the new legislation.

Appendix 1: Top Marginal Tax Rates for Individuals

The table below provides the top marginal tax rates for capital gains and dividends for individuals across different provinces and territories. It shows the rates for the current 50% capital gains inclusion rate, the proposed 66.67% inclusion rate, and the rates for eligible and non-eligible dividends as of 2024.

Province/Territory	Capital Gains (50% inclusion)	Capital Gains (66.67% inclusion)	Eligible Dividends	Non-Eligible Dividends
Alberta	24.00%	32.00%	34.31%	42.31%
British Columbia	26.75%	35.67%	36.54%	48.89%
Manitoba	25.20%	33.60%	37.78%	46.67%
New Brunswick	26.25%	35.00%	32.40%	46.83%
Newfoundland and Labrador	27.40%	36.53%	46.20%	48.96%
Nova Scotia	27.00%	36.00%	41.58%	48.28%
Nunavut	22.25%	29.67%	33.08%	37.79%
Northwest Territories	23.53%	31.37%	28.33%	36.82%
Ontario	26.77%	35.69%	39.34%	47.74%
Prince Edward Island	25.88%	34.51%	36.20%	47.63%
Quebec	26.65%	35.54%	40.11%	48.70%
Saskatchewan	23.75%	31.67%	29.64%	41.82%
Yukon	24.00%	32.00%	28.93%	44.04%

 

Appendix 2: 2024 Capital Gains and Dividends Tax Rates for Corporations

The following table illustrates the corporate tax rates on capital gains and eligible dividends by province/territory when the capital gains inclusion rate is at 50% and 66.67%.

Province/Territory	Corporate Tax on Capital Gains (50% inclusion)	Corporate Tax on Capital Gains (66.67% inclusion)	Eligible Dividends
Alberta	23.34%	31.11%	38.33%
British Columbia	25.34%	33.78%	38.33%
Manitoba	25.34%	33.78%	38.33%
New Brunswick	26.34%	35.11%	38.33%
Newfoundland and Labrador	26.84%	35.78%	38.33%
Nova Scotia	26.34%	35.11%	38.33%
Nunavut	25.34%	33.78%	38.33%
Northwest Territories	25.09%	33.45%	38.33%
Ontario	25.09%	33.45%	38.33%
Prince Edward Island	27.34%	36.45%	38.33%
Quebec	25.09%	33.45%	38.33%
Saskatchewan	25.34%	33.78%	38.33%
Yukon	39.41%	26.75%	35.67%

 

Conclusion: Navigating New Tax Landscapes with Shajani CPA

As we approach significant changes in the tax landscape for 2024, it becomes increasingly important for individuals and corporations across Canada to revisit their financial and tax strategies. The upcoming adjustments to the capital gains inclusion rate—from 50% to 66.67%—along with variations in dividend taxation, necessitate careful planning and foresight. This change will impact investment decisions, estate planning, retirement strategies, and the management of corporate and personal assets.

From optimizing the use of the Capital Dividend Account (CDA) to effectively integrating advanced strategies such as permanent life insurance and Individual Pension Plans (IPPs), there are numerous ways to mitigate the impact of these tax changes. Additionally, the management of real estate, whether personal vacation properties or investment holdings, must be reconsidered under the new tax regime to ensure efficiency and tax savings.

Given the complexity and breadth of these changes, professional guidance becomes not just beneficial but essential. Shajani CPA offers specialized expertise in navigating these changes, providing personalized strategies that align with both current and anticipated tax laws. Our focus is on ensuring that your financial planning not only meets compliance standards but also optimizes your tax position to support your long-term financial health and legacy planning.

As demand for skilled tax advisory is expected to rise in response to these changes, we encourage you to engage Shajani CPA soon. Planning with our team will ensure that you are well-prepared and positioned to navigate this evolving tax landscape effectively, avoiding the rush and ensuring comprehensive, thoughtful financial guidance.

Let Shajani CPA guide you through these changes with expertise and foresight. Reach out today to secure your consultation and stay ahead in your financial and tax planning efforts.

 

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.