17 Oct Navigating Capital Gains Changes: Impacts on Estate Planning
You may have heard that the Government of Canada has proposed changing the capital gains inclusion rate from 50% to 66.67%, effective for dispositions after June 24. Under this new proposal, individuals and certain trusts (such as general rate estates and qualified disability trusts) can still benefit from a $250,000 annual threshold, where the first $250,000 of capital gains will be taxed at the 50% inclusion rate. The 66.67% rate will only apply to the remaining portion of the capital gains. However, corporations and other types of trusts will not have access to this threshold, meaning all their capital gains will be subject to the new inclusion rate.
While the legislation has not yet been passed by Parliament, we anticipate it will be approved sometime this fall. Although the government claims this change will impact less than 1% of individuals, it will significantly affect companies with capital gains and individuals with substantial accrued gains that may be realized upon death. This occurs because assets are deemed to be disposed of at fair market value at the time of death, triggering tax on any gains—except in cases where assets transfer to a spouse.
As a result of these changes, we encourage anyone with significant accrued gains to consider the impact on their estate planning, particularly regarding the transfer of rental properties or recreational property to their children.
Example:
Consider the following example: Person A acquired a commercial rental property in the early 2000s. The only other asset Person A has is their principal residence, which is unaffected by these rule changes. Given the rise in real estate prices, there is an accrued gain of $5 million on the commercial rental property. Person A’s goal is to transfer the property to their two children in their Will.
The differences in the tax rules as follows:
| Old Rules | New Rules | |
| Capital Gain | $5,000,000 | $5,000,000 |
| Taxable Capital Gain | 2,500,000 | 3,291,685 |
| Estimated Income Tax (assuming highest marginal rates) | $1,337,500 | $1,761,051 |
As a result, Person A’s estate should plan for approximately $423,000 in additional taxes as a result of these rule changes.
Recommendation:
Given these changes, there is the likelihood that the income tax cost of any capital gains on significant dispositions have increased.
We recommend that you review your personal situation where you have any significant gains and discuss any planning options with your Clearline advisor. We may be able to suggest some tax planning techniques to reduce the amount of tax on the gains, particularly if the appreciated property consists of shares in private companies or farm property that you wish to transfer to your children in the future.
