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Proposed changes to the capital gains inclusion rate in the latest federal budget are creating some concern for medical professionals. How could the changes impact your retirement strategy, particularly if you have investments inside your corporation? Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Kim Parlee to discuss.
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* The latest federal budget included changes to capital gains rules, which is creating some concern for medical professionals, specifically on their ability to save for retirement. Nicole Ewing, Director of Tax and Estate Planning at TD Wealth, joins us now with some things to keep in mind. Nicole, take us through the changes and then also what this means for, I guess, the retirement question for medical professionals.
* So the budget announced a proposed change of the inclusion rate with respect to corporations. And that inclusion rate is going from 50% up to 66.67%. Essentially on any capital gain that is realized within a corporation. It will be subject to this new inclusion rate as of June 25, 2024.
- So if we look at an example of an asset that was purchased within the corporation for $1 million, it's been sold for $2 million, we have $1 million gain, the taxable capital gain currently is $500,000 resulting in corporate income tax payable of $250,850. Now, as of June 25, 2024, that same scenario will result in a taxable capital gain of $666,700 and a corporate income tax payable of $334,500-- so, essentially, a difference of a little bit less than $84,000, so pretty significant difference.
- It's also going to be impacting the capital dividend account, which is the account that tracks the amount of tax-free dollars that you can get out of the corporation. And that's going to also change from 50% now, reducing to a third. So it will impact not only what the tax is within the corporation but also what sorts of funds you can withdraw from that corporation tax-free at a later date.
* And now, we understand why people are concerned about how this can impact their retirement plans, because for many, this is their retirement plan. They don't have the pensions, and the employer pensions, those types of things that others have. My understanding is a lot of incorporated medical professionals also invest inside their corporations as part of their retirement planning.
* They do. And then those investments are going to be subject to this capital gains rate as well. And so there is some thought about whether or not you should be accelerating those gains, maybe crystallizing them, realizing them now, and be subject to that lower rate. But we would caution people to really take a pause and think about the broader impact.
- Because if we're accelerating those gains, we're also going to have to think about what we're going to be using those funds for, how it's going to be reinvested. But also, it's going to increase the passive investments that you have within your corporation and potentially impact the access to the small business deduction. The small business deduction is that $500,000 of preferred rate that you can get on active business income, but it is ground down to the extent you have passive income within your corporation.
- So none of this should be done on an urgent basis. We have until June 25. But we do really need to think about the overall impacts when we're looking at the complete picture.
* Yeah. And we should mention as well, too, that these changes that are being proposed, these are not just affecting incorporated doctors. There's also an impact on non-incorporated doctors as well.
* It is. Because investments-- you know, investments that you hold in a non-registered account-- perhaps you hold rental properties, perhaps you have a cottage in your name-- these are going to be impacting people in a whole bunch of different ways. So looking at your personal and your corporate situation together is really recommended.
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* So the budget announced a proposed change of the inclusion rate with respect to corporations. And that inclusion rate is going from 50% up to 66.67%. Essentially on any capital gain that is realized within a corporation. It will be subject to this new inclusion rate as of June 25, 2024.
- So if we look at an example of an asset that was purchased within the corporation for $1 million, it's been sold for $2 million, we have $1 million gain, the taxable capital gain currently is $500,000 resulting in corporate income tax payable of $250,850. Now, as of June 25, 2024, that same scenario will result in a taxable capital gain of $666,700 and a corporate income tax payable of $334,500-- so, essentially, a difference of a little bit less than $84,000, so pretty significant difference.
- It's also going to be impacting the capital dividend account, which is the account that tracks the amount of tax-free dollars that you can get out of the corporation. And that's going to also change from 50% now, reducing to a third. So it will impact not only what the tax is within the corporation but also what sorts of funds you can withdraw from that corporation tax-free at a later date.
* And now, we understand why people are concerned about how this can impact their retirement plans, because for many, this is their retirement plan. They don't have the pensions, and the employer pensions, those types of things that others have. My understanding is a lot of incorporated medical professionals also invest inside their corporations as part of their retirement planning.
* They do. And then those investments are going to be subject to this capital gains rate as well. And so there is some thought about whether or not you should be accelerating those gains, maybe crystallizing them, realizing them now, and be subject to that lower rate. But we would caution people to really take a pause and think about the broader impact.
- Because if we're accelerating those gains, we're also going to have to think about what we're going to be using those funds for, how it's going to be reinvested. But also, it's going to increase the passive investments that you have within your corporation and potentially impact the access to the small business deduction. The small business deduction is that $500,000 of preferred rate that you can get on active business income, but it is ground down to the extent you have passive income within your corporation.
- So none of this should be done on an urgent basis. We have until June 25. But we do really need to think about the overall impacts when we're looking at the complete picture.
* Yeah. And we should mention as well, too, that these changes that are being proposed, these are not just affecting incorporated doctors. There's also an impact on non-incorporated doctors as well.
* It is. Because investments-- you know, investments that you hold in a non-registered account-- perhaps you hold rental properties, perhaps you have a cottage in your name-- these are going to be impacting people in a whole bunch of different ways. So looking at your personal and your corporate situation together is really recommended.
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