2024 Federal Budget: A spotlight on how capital gains changes may affect you

The recent updates to capital gains taxation in the 2024 Federal Budget have stirred a lot of discussion among investors and their advisors. The changes, while they may appear limited, could have broad implications for business owners, regular shareholders and families managing estates.

Just as a reminder, Ottawa’s new budget proposes to increase the capital gains inclusion rate from 50% to 66.67% on the amount of annual capital gains above $250,000 for individuals but from the first dollar for corporations and trusts. This means the first quarter-million dollars will continue to be taxed at the current 50% rate for individuals but any amount beyond this threshold will be taxed at the higher rate starting June 24, 2024.

More than meets the eye

Initially, the government’s projection that the new capital gains changes would affect only 40,000 Canadian taxpayers seemed modest. The reality appears far more extensive, to put it mildly. Business owners, individuals with significant long-term investments in equities and those owning property like cottages are all right to be concerned. The potential tax implications are considerable, especially for properties that have appreciated significantly over time and stocks that have gained substantial value.

For estates, families face a potential tax time bomb. With the death of a spouse, the surviving partner usually inherits the estate without immediate tax implications. But, with the subsequent death of the surviving spouse, all the estate’s assets are assessed at their current market value, which can push the total estate value into the highest tax brackets due to accumulated capital gains, remaining RRIF or LIF account balances, and other assets.

The timing of these changes has created anxiety among investors with significant assets, many of whom are rushing to adjust their portfolios before the June 24 cut-off date. The government’s timing seems particularly strategic, aimed at accelerating tax revenue ahead of fiscal deadlines.

Critics of the new measure also cite its inherent unfairness — ironic for a budget that claims to be about fairness. Wealthy Canadians with significant stock or mutual fund portfolios have a great deal of flexibility in when and by how much they realize capital gains in a given year to stay under the $250,000 threshold. However, someone leaving a family cottage by sale or death or a small business owner selling a business in a once-in-a-lifetime transaction is less able to spread out the disposition over a number of years. It could be argued that the new tax hits small and medium sized business owners the hardest.

What you can do now

  1. Review and adjust portfolio: Consider reviewing your portfolio with your advisor to understand potential capital gains exposure and make necessary adjustments. This might include selling off portions of assets to manage gains more effectively. By realizing gains gradually each year to stay below the $250,000 threshold, you may be able to mitigate some of the additional tax burden.
  2. Plan your estate: Especially in the context of capital gains, it’s a good idea to discuss options with your advisor to manage and transfer wealth more efficiently in the future.
  3. Stay informed and consult professionals: Lean on tax professionals and financial advisors — they can provide you with personalized advice that takes into account these and future tax updates.

The changes to capital gains in this year’s Federal Budget are, above all, a call to action for thoughtful and strategic financial planning. Understanding and responding proactively can help you better protect your assets and ensure your plans align with the new tax landscape.

If you’d like to talk about the new capital gains rules or any aspect of financial planning and investing, reach out to us anytime — we’re always here to help.