The federal budget announcement on April 16, 2024 included a proposal to increase the capital gains inclusion rate, to be effective June 25, 2024. A brief summary of the proposed changes are as follows:
- Currently, the inclusion rate for a capital gain is 50%. If there is a capital gain of $150, 50% – or $75 – is included in income, taxed at the applicable tax rate.
- The proposed rules would increase the inclusion rate to 66.67%. If there is a capital gain of $150, $100 will be included in income, taxed at the applicable tax rate.
- For individuals, the first $250,000 of capital gains after June 25, 2024 will still have a 50% inclusion rate. Any capital gains over $250,000 will be subject to the 66.67% inclusion rate.
- For corporations and trusts, there is no such $250,000 threshold – the inclusion rate is 66.67% from the first dollar.
The government is positioning this change as something that will only impact 0.13% of individuals, but that is simply untrue. While many individuals will not have annual capital gains of more than $250,000, there are many one-time events that may occur that can result in significant gains, such as the sale of a business; the sale of a cottage or other property; the death of an individual, etc. This is not to mention the number of businesses and trusts that own investment portfolios, real estate, or other capital assets, all of which will be affected by these new rules.
What should you do?
The main thing to keep in mind is that these changes are still only proposals. There has been no draft legislation, and there has already been vocal pushback from taxpayers. The rules could change, or be delayed, or be reversed in a year’s time. Rather than impulsively making investment decisions, you should carefully consider your long-term goals, and have timely discussions with your trusted advisors to see what the best course of action would be for your specific situation.
Remember that triggering gains before June 25, 2024 results in a prepayment of tax, if the gain was not otherwise contemplated in the near term. In some cases, triggering the capital gains earlier may not necessarily create the cash needed to pay the tax, putting you in a cash-strapped situation. In other cases, the cash that is used to pay the taxes could have been invested for a longer period of time, or otherwise provide a return on investment that is higher than the additional taxes payable under the new inclusion rate.
However, for assets that are expected to be sold or transferred in the next year or so, planning steps could be implemented to avoid or reduce the amount of the gain that will be subject to the higher inclusion rate.
Contact us
We are in the process of identifying our clients that may be impacted by these proposed changes, and we will be reaching out shortly to have the discussion with you – and your investment advisor – on what you should consider, or what actions can be taken. If there are events occurring that we may not know about, such as an impending sale of property, please contact us and let us know.
For anyone in a situation where you believe these proposed changes may impact you or your business, Lott & Company is happy to have that discussion with you and provide advice. Please contact our office to be connected to one of our team members.
