Show Transcript
Wondering how or if the federal government’s proposed capital gains tax changes could affect you? Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Kim Parlee to discuss some ways cottage owners and trust holders might be impacted, and strategies to manage the new rules.
*On June 10, 2024, the federal government released proposed legislation which extended the lower inclusion rate on gains under $250,000 to Graduated Rate Estates and Qualified Disability Trusts.
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* The federal government's proposed capital gains tax changes are top of mind for many Canadians right now. Especially if you own a cottage, or investment properties, or have a family trust set up, or have money in non-registered accounts, this could impact you.
- Nicole Ewing is Director of Tax and Estate Planning at TD Wealth and she joins us now with a whole lot more. OK, we're going to go through some examples, which I think is very useful for people. But let's start with the basics. What happened?
* Currently, the inclusion rate for capital gains is 50%. This means if you sell a capital property, you need to include 50% of the gain, and that's going to be subject to your marginal rate. What has changed is that the inclusion rate is different as of June 25, 2024. For trusts and corporations, immediately, we're looking at a new 2/3 inclusion rate.
- For individuals, the first $250,000 will continue to be subject to a 50% inclusion rate. But over that amount, we are now going to be subject to a 2/3 inclusion rate. We don't have the legislation yet, but we also assume that that same rule will apply on death, where we have a deemed disposition for that extra 2/3 amount over $250,000.
* So let's get into some of the examples, I promised. And you've put together some, I think, really instructive ones for us. Let's bring up the chart that you've given us, Nicole. And this is a cottage example.
* Right. And so this is likely where some people might get impacted where they otherwise wouldn't. This is what we call lumpy gains, where you may have a capital property that you are selling that's going to bump you into that higher income year. So if, for example, we're looking at a cottage that has a cost basis of $1 million where sale proceeds of $2 million, under the current rules, you're looking at a 50% inclusion rate and a taxable capital gain of $500,000.
- Looking at tax payable, $267,650. As of June 25, that same sale, you're looking at purchasing the property for a million, sold for $2 million, a capital gain of $1 million, but the taxable capital gain will increase to $625,000. That is a difference of $66,913 versus if you're selling that same property now versus selling that property after June 25, 2024.
* That is not an insignificant amount of money. And I think people, that's why we're hearing about it so much right now. I want to go into the next example, Nicole. You've got here looking at when someone passes away, what happens to non-principal residences or investment properties in the context of these changes.
* Well, so when we think about on death, we are deemed to have disposed of all of our assets at fair market value. That means our capital property is essentially deemed to have been sold. And if it's not your principal residence, that capital property, if it's a cottage, is going to be included and subject to tax in your year of death. And we have to assume, as we don't have legislation, we have to assume that those same new rules will apply.
- So under $250,000, you're looking at the 50% inclusion rate. And over that $250,000, you have a new 2/3 rate, which is going to get people thinking about what they should do. So if, for example, in your year of death, you have the automatic rollover to a surviving spouse tax-free, people might be electing out of that in the future, perhaps on the first $250,000, to realize those gains in the hands of the deceased individual and then carry forward the excess amount to the surviving spouse.
- We might be thinking about transferring that same cottage over a number of years. So perhaps transferring 20% over five years and getting to that 100%. So you're only realizing a little bit at a time. And we do need to think about for rental properties as well, whereas the capital cost allowance that you would have been claiming is going to be included fully recaptured in your year of death or deemed disposition.
- But these major improvements that haven't otherwise been written off as rental expenses will be able to be added to your cost basis, potentially increasing then your cost basis and reducing that overall gain. So receipts, receipts, receipts are going to be even more important going forward.
* I want to get a couple more in here, too, because we talked about trusts being impacted and also non-registered investments. Maybe give us a quick one on each one of those, too.
* Well, so trusts are going to be included. Trusts immediately are going to be impacted at the 2/3 rate. So assuming that same example of the cottage before, we'd be looking at a difference of $89,234 for that gain to be realized in a trust, post June 25, 2024. We might be thinking about rolling that property out, having it taxed in multiple beneficiaries' hands, as opposed to it being taxed in your trust, where it's subject to the highest marginal rates.
- We might be thinking about rolling it out to multiple beneficiaries and having them each claiming a portion of it. So some strategies to think about there. When it comes to the non-registered investment accounts, it's really important-- there might be that temptation to crystallize your gains before June, but that needs to be thought of in the broader context of it.
- So an example here would be, if I've sold my million dollars in capital gains and I have that extra $267,650 of tax that I'm now going to need to include in my income tax for next year, I'm going to be subject to that tax. If instead I did not accelerate those tax and I kept that invested and I allowed it to grow, at 2%, we're looking at a 13-year break even point. At 3% net of taxes and fees, we're looking at nine years.
- So that deferral advantage continues to apply. If you're realizing gains simply because you're nervous about that higher potential rate, you really do need to do the math. Look at your own personal circumstances. Look at your goals. What are you trying to achieve? And whether or not it makes sense to accelerate those gains will be really up to each individual to determine in their particular cases.
* Yeah, and I know we always say this, but really, really mean it on this one. This is when you need to talk to an advisor to really figure out with your own personal situation what the best path is on this.
* Absolutely. This is where they can model out some scenarios for you. Look at that difference between a 2%, 3%, 5%, depending on what they're expecting to receive for you. And really look at whether or not there should be changes to your overall investment strategy-- how you're holding those assets, whether you're holding title in multiple names. You know, a lot of different potential considerations and strategies that could be implemented. But again, really, really case specific.
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- Nicole Ewing is Director of Tax and Estate Planning at TD Wealth and she joins us now with a whole lot more. OK, we're going to go through some examples, which I think is very useful for people. But let's start with the basics. What happened?
* Currently, the inclusion rate for capital gains is 50%. This means if you sell a capital property, you need to include 50% of the gain, and that's going to be subject to your marginal rate. What has changed is that the inclusion rate is different as of June 25, 2024. For trusts and corporations, immediately, we're looking at a new 2/3 inclusion rate.
- For individuals, the first $250,000 will continue to be subject to a 50% inclusion rate. But over that amount, we are now going to be subject to a 2/3 inclusion rate. We don't have the legislation yet, but we also assume that that same rule will apply on death, where we have a deemed disposition for that extra 2/3 amount over $250,000.
* So let's get into some of the examples, I promised. And you've put together some, I think, really instructive ones for us. Let's bring up the chart that you've given us, Nicole. And this is a cottage example.
* Right. And so this is likely where some people might get impacted where they otherwise wouldn't. This is what we call lumpy gains, where you may have a capital property that you are selling that's going to bump you into that higher income year. So if, for example, we're looking at a cottage that has a cost basis of $1 million where sale proceeds of $2 million, under the current rules, you're looking at a 50% inclusion rate and a taxable capital gain of $500,000.
- Looking at tax payable, $267,650. As of June 25, that same sale, you're looking at purchasing the property for a million, sold for $2 million, a capital gain of $1 million, but the taxable capital gain will increase to $625,000. That is a difference of $66,913 versus if you're selling that same property now versus selling that property after June 25, 2024.
* That is not an insignificant amount of money. And I think people, that's why we're hearing about it so much right now. I want to go into the next example, Nicole. You've got here looking at when someone passes away, what happens to non-principal residences or investment properties in the context of these changes.
* Well, so when we think about on death, we are deemed to have disposed of all of our assets at fair market value. That means our capital property is essentially deemed to have been sold. And if it's not your principal residence, that capital property, if it's a cottage, is going to be included and subject to tax in your year of death. And we have to assume, as we don't have legislation, we have to assume that those same new rules will apply.
- So under $250,000, you're looking at the 50% inclusion rate. And over that $250,000, you have a new 2/3 rate, which is going to get people thinking about what they should do. So if, for example, in your year of death, you have the automatic rollover to a surviving spouse tax-free, people might be electing out of that in the future, perhaps on the first $250,000, to realize those gains in the hands of the deceased individual and then carry forward the excess amount to the surviving spouse.
- We might be thinking about transferring that same cottage over a number of years. So perhaps transferring 20% over five years and getting to that 100%. So you're only realizing a little bit at a time. And we do need to think about for rental properties as well, whereas the capital cost allowance that you would have been claiming is going to be included fully recaptured in your year of death or deemed disposition.
- But these major improvements that haven't otherwise been written off as rental expenses will be able to be added to your cost basis, potentially increasing then your cost basis and reducing that overall gain. So receipts, receipts, receipts are going to be even more important going forward.
* I want to get a couple more in here, too, because we talked about trusts being impacted and also non-registered investments. Maybe give us a quick one on each one of those, too.
* Well, so trusts are going to be included. Trusts immediately are going to be impacted at the 2/3 rate. So assuming that same example of the cottage before, we'd be looking at a difference of $89,234 for that gain to be realized in a trust, post June 25, 2024. We might be thinking about rolling that property out, having it taxed in multiple beneficiaries' hands, as opposed to it being taxed in your trust, where it's subject to the highest marginal rates.
- We might be thinking about rolling it out to multiple beneficiaries and having them each claiming a portion of it. So some strategies to think about there. When it comes to the non-registered investment accounts, it's really important-- there might be that temptation to crystallize your gains before June, but that needs to be thought of in the broader context of it.
- So an example here would be, if I've sold my million dollars in capital gains and I have that extra $267,650 of tax that I'm now going to need to include in my income tax for next year, I'm going to be subject to that tax. If instead I did not accelerate those tax and I kept that invested and I allowed it to grow, at 2%, we're looking at a 13-year break even point. At 3% net of taxes and fees, we're looking at nine years.
- So that deferral advantage continues to apply. If you're realizing gains simply because you're nervous about that higher potential rate, you really do need to do the math. Look at your own personal circumstances. Look at your goals. What are you trying to achieve? And whether or not it makes sense to accelerate those gains will be really up to each individual to determine in their particular cases.
* Yeah, and I know we always say this, but really, really mean it on this one. This is when you need to talk to an advisor to really figure out with your own personal situation what the best path is on this.
* Absolutely. This is where they can model out some scenarios for you. Look at that difference between a 2%, 3%, 5%, depending on what they're expecting to receive for you. And really look at whether or not there should be changes to your overall investment strategy-- how you're holding those assets, whether you're holding title in multiple names. You know, a lot of different potential considerations and strategies that could be implemented. But again, really, really case specific.
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[MUSIC PLAYING]
