Deputy Prime Minister and Minister of Finance Chrystia Freeland holds a press conference in the media-lockup prior to tabling the federal budget in Ottawa on April 16.Sean Kilpatrick/The Canadian Press
Over the last week, I’ve received more e-mails and calls than you can count, all on the issue of the increased capital gains inclusion rate introduced in the 2024 federal budget, which I wrote about last week. The general theme can be summed up in two words: anger and frustration. Some of the concerns are valid, so I’d like to share a few.
Estate plans have been thrown into disarray. A gentleman named Alex called me this week and shared that he had included in his will a donation to charity that will provide tax relief on his death. The money to donate is coming from an insurance policy payable upon his death. With the increased inclusion rate, the donation in his will and the amount of insurance is no longer sufficient to offset his taxes owing and he can’t afford to buy more insurance (besides, he’s no longer insurable), or to donate more.
Like Alex, many middle-class Canadians will face significant capital gains taxes on death because we’re deemed to have sold each capital property (most assets) owned when we die.
Cottages are caught in these rules. Our friend, Rod, inherited a cottage from his parents many years ago (he could not have afforded to buy one himself). The place is worth $500,000 more today than when he inherited it. His tax liability when he dies will now be one-third higher than it was prior to the increase in the inclusion rate. The cottage is the primary asset he’s leaving to the kids. Rod isn’t sure whether his kids will be able to pay the additional tax owing; they may have to sell the cottage to pay the taxes.
Retirement nest eggs have been hit. A man by the name of Brent e-mailed me to comment on the impact of the higher inclusion rate on his retirement savings. Most professionals across the country (doctors, dentists, veterinarians, social workers, accountants, lawyers, engineers and certain health care workers, for example) set up professional corporations through which they earn the income from their careers.
These folks typically accumulate investments in their corporations, which form their retirement savings for the future. Brent is retiring in two weeks and he’s concerned about being able to withdraw from his professional corporation the amount he was expecting. Under the new rules, he’ll end up with almost $200,000 less in retirement savings after taxes than he expected. That will have an impact on his standard of living or reduce the length of time his savings will last.
Average hard-working Canadians are affected. Julie and her husband e-mailed me. They have always been low- to middle-income earners. She ran a home daycare for 20 years and her husband was a maintenance worker with the local school board. They have always lived modestly. Their Christmas gift to each other has been paying down their mortgage. They buy most of their clothes from a thrift shop; they cut each other’s hair; and they don’t eat out. They’ve saved money for many years.
Their hard work and willingness to go without luxuries allowed them, in 2017, to purchase a small rental property to provide income in retirement and leave something to their kids. Their annual incomes put them in one of the lowest tax brackets, yet the government would have you believe that they are “the wealthy” in this country. Accordingly, they should face higher taxes on their capital gains because “nurses, teachers, construction workers, servers, labourers and young professionals – those in the middle class, and those working hard to join it” (as the federal budget document puts it) – should not have to live with folks like Julie and her husband enjoying lower tax rates on their capital gains.
The lower-rate threshold is disingenuous. Another reader asked about the interaction between the new, higher capital gains inclusion rate and the alternative minimum tax (AMT) rules that came into effect on Jan. 1. The reader correctly noted that the $250,000 capital gains threshold amount, under which the government has said the old 50-per-cent inclusion rate would apply, is actually not the complete story.
If you have a capital gain of more than $173,000 then you have to do an AMT calculation using an inclusion rate of 100 per cent. AMT may or may not apply depending on the size of the gain and your other income.
One thing is for sure: The budget changes do nothing but overly complicate the tax system by adding another inclusion rate, for no meaningful increase in tax revenue. Certainly not an increase in taxes in excess of the additional costs to taxpayers and the government for administering the system.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.