The pros and cons of triggering capital gains before June 25, 2024

Considerations for individual taxpayers

Capital gains realized by individual taxpayers on or after June 25, 2024 will only be subject to the increased inclusion rate on the portion of those gains that exceed an annual limit of $250,000 (net of capital losses).

For certain types of property, such as publicly traded securities and mutual funds, this annual limit provides flexibility to structure the realization of capital gains over more than one year, so that your gains remain at the 50% inclusion rate.

For instance, if an individual holds a non-registered investment account with unrealized capital gains of $500,000 and they want to trigger those gains in the short term (for example, to use the funds to buy real estate), they have the option to structure the realization of those gains so that they occur over multiple years. This way, the lower 50% inclusion rate would apply to the entire capital gain.

As a result, to remain within the 50% capital gains inclusion rate, individuals with significant accrued gains on certain types of property, such as publicly traded shares or mutual funds, may not need to undertake planning prior to June 25, 2024.

If it’s not possible or practical to avoid the recognition of a capital gain in excess of the $250,000 annual limit (for example, on the sale of real estate), and a disposition is already planned in the near future, it may be advisable to try and complete the sale before June 25, 2024. This would therefore avoid the higher 66.67% inclusion rate on the portion of those gains that exceed the $250,000 annual limit. For an individual taxpayer in the top personal tax bracket, the higher inclusion rate would represent an increase of roughly 8% to 10% in the tax rate on capital gains (depending on your province of residency in the year the gain is realized).

In situations where the higher inclusion rate cannot be avoided, the question is ultimately one of the time value of money, with the optimal course of action being dependent on the expected return rate on the asset and the length of time the asset will be held.

Investors with a short to mid-term time horizon and lower expected return rate may benefit from triggering gains before June 25, 2024. However, investors with a long-term time horizon and higher expected return rates will frequently achieve better financial results by not triggering gains and prepaying tax (prepaying tax reduces the amount of capital working for the investor over the long term).

Triggering capital gains can also impact income-tested benefits, such as Old Age Security, and may generate Alternative Minimum Tax (which is potentially recoverable over seven years, depending on the client’s future sources of income). Each situation would need to be analyzed on a case-by-case basis.

Considerations for corporations and trusts

For corporate and trust taxpayers, there is no annual limit on realized capital gains before the higher two-thirds inclusion rate applies. This means all capital gains realized by corporations after June 24, 2024 will be subject to the higher inclusion rate. Capital gains realized and retained within trusts after June 24, 2024 will also be subject to the higher inclusion rate. However, trusts frequently allocate capital gains to the individual beneficiaries to avoid taxation within the trust, and each individual beneficiary will have the benefit of an annual $250,000 limit before capital gains will be taxed at the higher two-thirds inclusion rate.

For corporately held assets with unrealized capital gains, our initial analysis indicates that it would be advantageous to trigger capital gains before June 25 if the shareholders or the corporation need the cash in the short term. This is driven by the fact that corporations will not benefit from a lower inclusion rate on the first $250,000 of capital gains after June 24.

However, when money is invested for longer-term goals, there are various factors to consider. These include the makeup and size of future investment returns, the loss of investment capital through the prepayment of tax and the potential reduction or loss of the small business deduction in the following taxation year (causing an additional loss of tax deferral).

When the investment is intended for the long term, the benefit of triggering gains will often not be significant. Given the complexities associated with the integration of corporate and personal tax and the significant differences between the provinces, clients should discuss their situation with their accountant before realizing a capital gain within a corporation.

There are still plenty of unknowns

The government released no draft legislation with these proposals. The budget indicates additional details are to be provided in the coming months, leaving uncertainty as to how the final rules will work.

All analysis regarding corporate and personal taxation assumes:

There will be no change to the refundable corporate tax regime.
Personal tax rates will remain consistent.
The proposals will be enacted into law, which cannot be guaranteed.

Longer-term implications

These proposed changes will have significant implications for longer-term planning and have the potential to make insurance strategies more attractive. We’ll conduct further analysis when draft legislation is released.

^{This article, specifically written and published by IG Wealth Management, is presented as a general source of information only. It is not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Advisor.}

^{The tax information provided in this document is general in nature and each client should consult with their own tax advisor, accountant and lawyer before pursuing any strategy described herein, as each client’s individual circumstances are unique. We have endeavoured to ensure the accuracy of the information provided at the time that it was written, however, should the information in this document be incorrect or incomplete or should the law or its interpretation change after the date of this document, the advice provided may be incorrect or inappropriate. There should be no expectation that the information will be updated, supplemented or revised, whether as a result of new information, changing circumstances, future events or otherwise. We are not responsible for errors contained in this document or to anyone who relies on the information contained in this document. Please consult your own legal and tax advisor.}