The Federal government’s 2024 budget included a proposal to increase the capital gains inclusion rate to 66.67% from 50%. The proposed rate increase would apply to gains realized on or after June 25, 2024. Given these changes, is now the time to realize a capital gain to take advantage of the lower inclusion rate?

Individuals

It is important to note that individuals with less than $250,000 in capital gains can still take advantage of the 50% inclusion rate. However, in some cases it may be wise to hold onto the assets, rather than liquidating and reinvesting.

Example:

• Current Portfolio: $2 million, with $1 million in unrealized capital gains.
• Impact of Selling Now: Results in $250,000 in capital gains taxes, leaving $1.75 million to reinvest. By 2036, with a 5% annual return, this could grow to nearly $3.14 million, or $2.7 million after taxes.
• Impact of Holding: The portfolio would grow to nearly $3.6 million in the same period, or $2.75 million after taxes. An increase of $50,000 over selling now.

It is possible to leverage the annual $250,000 threshold to stay at the 50% inclusion rate, by timing asset sales. There are also opportunities for income-splitting amongst couples.

For owners of second properties, it might be worth it to sell now or transfer it to a family member to avoid a higher future capital gains tax bill.

Corporations

The new inclusion rate applies to all capital gains in a corporation. There is no $250,000 threshold like that of the one that applies to individuals. This makes the decision to realize gains in a corporation a little trickier.

Investment holding companies may consider winding down their corporations before June 25^th to transfer the proceeds to its shareholders to take advantage of the personal $250,000 threshold annually.

There is also a consideration that must be made for small businesses that take advantage of the preferred tax rate for active business income below $500,000. Once a business earns more than $150,000 of passive income, they lose the preferred rate on all their income. The new inclusion rate will impact these calculations.

Charitable Giving

It might be more beneficial to donate appreciated securities in-kind from a corporation given the higher inclusion rate.

Conclusion

Although the proposed deadline is June 25^th, it is important to note that the changes are still proposals without draft legislation. When planning, it is important to acknowledge that once legislation is introduced, the proposals outlined could be amended.