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Capital gains tax changes dominate the federal budget aftermath. Kevin Quach, Business Succession Advisor, TD Wealth, and Sébastien Desmarais, Tax and Estate Planner, TD Wealth, discuss tax planning strategies high net worth individuals and business owners should consider in order to preserve their wealth and legacy.
*This is a French language video with English subtitles.
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Kevin Quach:
Hello, Sébastien. So the Minister of Finance tabled the 2024 federal budget earlier this week. And there are indeed several important elements that emerged that could have a significant impact on planning for high-net-worth individuals and business owners. First, could you tell us about the proposed changes to the capital gains inclusion rate?
Sébastien Desmarais:
Yes. So first, it should be noted that the proposed changes to the capital gains inclusion rate will only come into effect on June 25, 2024. So there is a transition period. For trust companies, the capital gains inclusion rate will be increasing from 50% to 66 2/3%. For individuals, the inclusion rate remains the same at 50% for the first $250,000, but above that, any amount, any gain over $250,000, the inclusion rate is increasing from 50% to 66 2/3%. Note, however, that the principal residence– the exemption for the principal residence is unchanged and therefore upon disposition of the principal residence, will be exempt from tax. Now, Kevin, it’s my turn. Can you tell us about the impact the change will have on Quebec residents?
Kevin Quach:
Yes. What is important to note and to remember is that harmonization in Quebec is not automatic. However, historically, Quebec has always applied the same tax treatment as the federal government with respect to capital gains inclusion rules. The decision will be made by the end of this week, so we’ll just have to wait a few days. And if harmonization is confirmed, starting on June 25, 2024, the highest tax rate on capital gains for individuals in Quebec will increase from 26.65% to 35.54%, which is a difference of 9%, but still lower than other types of investment income, such as interest and dividend income. In view of these changes, Sébastien, could you talk about the potential impacts on tax and estate planning?
Sébastien Desmarais:
Yes, I would say that the impact of increasing the capital gains inclusion rate, the greatest impact, will be taxes payable at death. Note that when a person dies, they are deemed to have disposed of their property at fair market value, which often results in a major capital gain. However, if the capital gain on the deceased’s tax return exceeds $250,000, the inclusion rate increases to 66 2/3%, compared to 50% right now. So certain estates may potentially end up with slightly more taxes to pay. And so some individuals will probably want to review their estate planning. There are also individuals with some of their retirement in a professional corporation or an investment corporation. They too will have to review their retirement planning following the change in capital gains.
Kevin Quach:
And what are some possible strategies to consider in your opinion?
Sébastien Desmarais:
It’s still a little early to get a real sense of the magnitude of the change. But I believe that as far as estates are concerned, it will be interesting to find out whether the rollover will be used at the first spouse’s death, namely, whether a small capital gain will be triggered at the first death, so that upon the death of the second spouse, a capital gain will remain under the $250,000 threshold. Another strategy that should be considered will be splitting the capital gain among family members. Now it’s my turn, Kevin, to ask you a question: you work with business owners, entrepreneurs; are there certain strategies that should be considered for those that are incorporated?
Kevin Quach:
Yes, but what we need to remember is that the $250,000 threshold, as you mentioned, only applies to individuals. So the two-thirds inclusion rate applies to corporations on the first dollar of realized capital gains. So, over the short term, for those who believe they have latent capital gains, we basically have to assess the need over the short term of realizing them. For instance, is there a plan to rebalance the portfolio by the end of the year? Are there plans to sell any assets in the short term? Or is there simply a need for cash? If so, there may be an opportunity to trigger the capital gain before June 25, 2024 to benefit from the 50% inclusion rate. So, in the long term, in certain situations, the allocation of the portfolio investments of an individual and his company should be reviewed to benefit from the $250,000 threshold, which will only be applicable and available to individuals. For instance, this may be of interest to those who have amounts owing to the company’s shareholder, which will make the allocation possible with the least possible tax impact. I would say that each case is different. So everyone should really meet with their experts to review their wealth management plan.
Sébastien Desmarais:
Also, Kevin, as far as business owners are concerned, were there any other changes in the budget that are worth mentioning?
Kevin Quach:
Yes. So for those who have active businesses, the 2024 federal budget provides an incentive for Canadian entrepreneurs who are looking to sell in the near future. This measure will reduce the capital gains inclusion rate to one-third over a lifetime maximum of $2 million in eligible capital gains per person. The other good news is that they also announced that the Lifetime Capital Gains Exemption would be increased to $1,250,000. So, combining the two tax benefits gives a tax break of $3,250,000 per person, which can be very interesting. However, what is important for business owners is to check with their accountant to make sure that their shares qualify first of all. From a planning point of view, I would say that this is one more reason for business owners to now consider restructuring their business so that they can possibly multiply these tax incentives with other family members, in anticipation of a potential sale of their company. But the main recommendation is to really talk to an expert to be guided through these new changes.
Sébastien Desmarais:
Thank you, Kevin, and rest assured that your planners at TD Bank are keeping an eye on all the budget changes. Thank you.
Kevin Quach:
Thank you.
Hello, Sébastien. So the Minister of Finance tabled the 2024 federal budget earlier this week. And there are indeed several important elements that emerged that could have a significant impact on planning for high-net-worth individuals and business owners. First, could you tell us about the proposed changes to the capital gains inclusion rate?
Sébastien Desmarais:
Yes. So first, it should be noted that the proposed changes to the capital gains inclusion rate will only come into effect on June 25, 2024. So there is a transition period. For trust companies, the capital gains inclusion rate will be increasing from 50% to 66 2/3%. For individuals, the inclusion rate remains the same at 50% for the first $250,000, but above that, any amount, any gain over $250,000, the inclusion rate is increasing from 50% to 66 2/3%. Note, however, that the principal residence– the exemption for the principal residence is unchanged and therefore upon disposition of the principal residence, will be exempt from tax. Now, Kevin, it’s my turn. Can you tell us about the impact the change will have on Quebec residents?
Kevin Quach:
Yes. What is important to note and to remember is that harmonization in Quebec is not automatic. However, historically, Quebec has always applied the same tax treatment as the federal government with respect to capital gains inclusion rules. The decision will be made by the end of this week, so we’ll just have to wait a few days. And if harmonization is confirmed, starting on June 25, 2024, the highest tax rate on capital gains for individuals in Quebec will increase from 26.65% to 35.54%, which is a difference of 9%, but still lower than other types of investment income, such as interest and dividend income. In view of these changes, Sébastien, could you talk about the potential impacts on tax and estate planning?
Sébastien Desmarais:
Yes, I would say that the impact of increasing the capital gains inclusion rate, the greatest impact, will be taxes payable at death. Note that when a person dies, they are deemed to have disposed of their property at fair market value, which often results in a major capital gain. However, if the capital gain on the deceased’s tax return exceeds $250,000, the inclusion rate increases to 66 2/3%, compared to 50% right now. So certain estates may potentially end up with slightly more taxes to pay. And so some individuals will probably want to review their estate planning. There are also individuals with some of their retirement in a professional corporation or an investment corporation. They too will have to review their retirement planning following the change in capital gains.
Kevin Quach:
And what are some possible strategies to consider in your opinion?
Sébastien Desmarais:
It’s still a little early to get a real sense of the magnitude of the change. But I believe that as far as estates are concerned, it will be interesting to find out whether the rollover will be used at the first spouse’s death, namely, whether a small capital gain will be triggered at the first death, so that upon the death of the second spouse, a capital gain will remain under the $250,000 threshold. Another strategy that should be considered will be splitting the capital gain among family members. Now it’s my turn, Kevin, to ask you a question: you work with business owners, entrepreneurs; are there certain strategies that should be considered for those that are incorporated?
Kevin Quach:
Yes, but what we need to remember is that the $250,000 threshold, as you mentioned, only applies to individuals. So the two-thirds inclusion rate applies to corporations on the first dollar of realized capital gains. So, over the short term, for those who believe they have latent capital gains, we basically have to assess the need over the short term of realizing them. For instance, is there a plan to rebalance the portfolio by the end of the year? Are there plans to sell any assets in the short term? Or is there simply a need for cash? If so, there may be an opportunity to trigger the capital gain before June 25, 2024 to benefit from the 50% inclusion rate. So, in the long term, in certain situations, the allocation of the portfolio investments of an individual and his company should be reviewed to benefit from the $250,000 threshold, which will only be applicable and available to individuals. For instance, this may be of interest to those who have amounts owing to the company’s shareholder, which will make the allocation possible with the least possible tax impact. I would say that each case is different. So everyone should really meet with their experts to review their wealth management plan.
Sébastien Desmarais:
Also, Kevin, as far as business owners are concerned, were there any other changes in the budget that are worth mentioning?
Kevin Quach:
Yes. So for those who have active businesses, the 2024 federal budget provides an incentive for Canadian entrepreneurs who are looking to sell in the near future. This measure will reduce the capital gains inclusion rate to one-third over a lifetime maximum of $2 million in eligible capital gains per person. The other good news is that they also announced that the Lifetime Capital Gains Exemption would be increased to $1,250,000. So, combining the two tax benefits gives a tax break of $3,250,000 per person, which can be very interesting. However, what is important for business owners is to check with their accountant to make sure that their shares qualify first of all. From a planning point of view, I would say that this is one more reason for business owners to now consider restructuring their business so that they can possibly multiply these tax incentives with other family members, in anticipation of a potential sale of their company. But the main recommendation is to really talk to an expert to be guided through these new changes.
Sébastien Desmarais:
Thank you, Kevin, and rest assured that your planners at TD Bank are keeping an eye on all the budget changes. Thank you.
Kevin Quach:
Thank you.
