Changes announced in Tuesday's federal budget are forcing advisors to manage an onslaught of client queries.Justin Tang/The Canadian Press
Sign up for the Globe Advisor weekly newsletter for professional financial advisors on our sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know. For more from Globe Advisor, visit our homepage.
Advisors have less than 10 weeks to help thousands of Canadians navigate major financial decisions triggered by a pending hike in the capital gains inclusion rate announced in this week’s federal budget.
The Liberal government announced that, as of June 25, corporations and trusts will pay income tax on 66.67 per cent of their capital gains annually, up from 50 per cent. The same increase applies to individuals but only on more than $250,000 in capital gains each year.
The surprise changes, dropped at the height of the tax-filing season, are forcing advisors to manage a new onslaught of client queries as they, too, try to sort through the complexities behind the new rules.
“The tax community is just starting to put their minds to these changes and how they will affect individuals and business owners in both the short and long term,” says Ethan Astaneh, a wealth advisor at Nicola Wealth Management Ltd. in Vancouver.
For business owners, near-term strategies could involve selling investments or shifting them to personal accounts to take advantage of lower capital gains before June 25. For individuals, options may include selling large appreciated assets, such as rental properties or vacation homes, or staggering the sale of large volumes of securities across more than one year. Some Canadians may also choose to accelerate their estate planning by transferring assets to beneficiaries by June 25 to lower the tax burden on the estate later on.
“It’s going to be a hard decision for a lot of people as to whether to pay taxes this year that they weren’t planning to versus paying a higher amount of taxes at some point later on,” says Brian Ernewein, senior advisor at KPMG in Canada’s national tax centre.
Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth in Toronto, says the changes aren’t a concern for the average Canadian. Still, they could affect people with an investment portfolio inside a holding company or those sitting on a significant gain in an asset such as securities, a secondary residence or income property.
“If it does apply, sit down with your tax accountant and crunch the numbers because everyone’s situation is different,” he says.
Business owners most affected
Canadians with investment portfolios in private corporations, which include a range of small business owners from doctors and dentists to IT consultants and real estate agents, will be among the hardest hit by the increase in the capital gains inclusion rate.
“A lot of these people have been planning their retirement using operating companies and holding companies to hold their wealth because it was a little more tax-efficient. That won’t necessarily be true after June 25,” says Darren Coleman, senior portfolio manager, private client group, with Coleman Wealth at Raymond James Ltd. in Toronto.
He says business owners need to decide whether it’s better to pay the lower tax rate today or leave the money to grow for a lot longer, even if it will be taxed at a higher rate in the future. Some business owners may also question whether it still makes sense to have an investment portfolio in a corporation, given the higher taxes.
For business owners who can sell their companies, the government has increased the lifetime capital gains exemption to $1.25-million from just more than $1-million, which Mr. Coleman describes as “sugar to help the pill go down.” The increase will also take effect on June 25 and will be indexed to inflation thereafter.
Since the budget was released on April 16, Mr. Coleman says a few clients have asked about the benefits of moving to a country with lower taxes.
“In Canada, taxes are based on residency, not on citizenship like in the U.S., so that worries me a bit,” he says.
Accelerating estate planning
Changes to the capital gains inclusion rate could also affect higher-net-worth Canadians who want to transfer wealth to the next generation, either while alive or through their estates.
Frank Di Pietro, assistant vice-president of tax and estate planning at Mackenzie Investments in Toronto, cites the example of an elderly couple who wants to gift the family cottage to an adult child.
“If the gain is more than $250,000, and the idea is to do it sooner rather than later, there are reasons to accelerate it and do it before June 25,” he says.
Mr. DiPietro says most assets transferred, gifted or left in an estate to anyone other than a spouse or common-law partner, such as real estate and investments, will also trigger capital gains. These assets are considered a deemed disposition, meaning the person who died is considered to have disposed of – or sold – the property.
“Whether it’s a gift or sale, for tax purposes, it’s the same result – you’re going to trigger a capital gain … there’s no way around it,” he says. “So, if it’s going to happen in the next couple of years, it may be better to do it now.”
People considering selling large assets, such as vacation properties or rental homes, might also want to consider doing it soon if the gain is more than $250,000. However, Mr. Di Pietro cautions that other investors might have the same idea, and there’s no guarantee the property will sell or close by June 25.
Canadians should also consider that the changes may not be forever. The capital gains inclusion rate was first introduced in 1972 at 50 per cent before being increased to 66.67 per cent in 1988 and then to a high of 75 per cent in the 1990s. In 2000, it dropped twice, first to 66.67 per cent and then to 50 per cent.
“The big unknown is whether the increase in the inclusion rate will survive a future change in government because we’ve seen in the past where the rates have been this high come back down again,” Mr. Golombek says.
For more from Globe Advisor, visit our homepage.