An older couple is sitting at their kitchen table reviewing financial documents.LaylaBird/iStockPhoto / Getty Images
Canada’s new higher capital-gains tax rate, announced in the spring federal budget, goes into effect this week – just two weeks after legislation explaining the details of how the change will work were released on June 10. For most people, it was hardly enough time to sell assets such as their cottage or income property to take advantage of the lower rate and potentially save money.
But that doesn’t mean people planning to leave assets to the next generation – or sell them to pass down cash – should ignore the recent changes either. Experts recommend Canadians take time to figure out what the new scheme means for their financial futures. Depending on whether people sell their high-value assets, or leave them in their estate, it could mean bigger tax bills than expected for them or less money for the recipients of their wealth transfer.
Planning alongside those set to receive your money is essential, said Dayna Holland, a North Vancouver-based chartered professional accountant with Calgary firm Affirm LLP. In particular, that means analyzing how much capital-gains tax will be due on an asset when it is transferred to an individual or corporation in the short term or leaving it in an estate.
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A capital gain is the amount that an asset has appreciated in value over the time someone owns it, and until this month’s change, only half of that gain was taxed. Under the new system, gains under $250,000 annually will still be taxed at the 50-per-cent inclusion rate – but only for individuals and certain types of trusts. Any capital gains above that amount will face an inclusion rate of 67 per cent.
“The way this government has decided to do it, it’s not as straightforward as it could be,” Ms. Holland said, adding that “it’s happening halfway through the year” instead of at the start of a new tax season.
If an asset, such as a cottage, will be transferred to a family member of the younger generation while the owner is still alive, both parties will need to figure out a way to pay the capital-gains tax, since there won’t be money coming in from an external buyer, Ms. Holland notes. If the older generation has owned a cottage for a long time, the chances are high that its value has soared.
“If you trigger a gain and you have to pay tax on it, and the gain is huge, how are you going to get the money?” Ms. Holland said. “Your grandkids who are in their twenties are not going to have the cash for the taxes.”
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Alternately, people can keep their assets and hand them over in their estate, which would pay the capital gains as part of the “date of death” tax return – but the gains will likely be higher by then, and will be taxed at the new rate. It’s why doing the math and seeking expert advice on one’s individual situation is so important, she said.
“It’s going to be so much more than a tax decision” when sentimental items such as property are involved, she adds. “If the grandparents are in their sixties and they expect to live until they’re 95, why would they pay tax on it now and lose control over it, rather than have a say in it and enjoy it?”
Soyoung Kim, a senior wealth consultant with financial advisers Edward Jones, also stresses the importance of getting expert advice on one’s situation, noting tax changes happen so frequently that it can be hard for people to stay on top of them and fully understand their long-term implications.
Ms. Kim, based in Mississauga, stressed the importance of having a life plan first, then figuring out how tax changes affect that plan, in order to weigh the changes’ effects on one’s goals.
“Oftentimes, our clients are so focused on tax planning that they miss the bigger picture,” she said. “You shouldn’t change your long-term goals based on tax changes.
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“I have never heard a family member say they want to be remembered for how well I did my tax planning.”
Ms. Kim said that other recent tax changes many were planning for – such as a requirement to file tax returns for bare trusts and to file for the Underused Housing Tax (UHT) – have been delayed or walked back to some degree by the federal government. The majority of Canadian homeowners are no longer required to file a UHT return, after a change was made to the initial policy, Ms. Kim said.
“Canadians should consult with their tax professionals if they are subject to UHT filing, especially [for] trusts, partnerships and corporations,” she said, noting it’s still complicated figuring out who has to file and who does not.
Canada Revenue Agency also allowed those who must file for 2022 an extended deadline – April 30 of this year, the same day that 2023 tax returns were due.
A new requirement to file 2023 tax returns for bare trusts set for April 2 was cancelled shortly before the deadline.
“There has been a lot of uncertainties and complexities to see what is really recognized as a bare trust,” Ms. Kim said. “Most of us are waiting to see what kind of clarifications the government will share with us in the future.”
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