You may have heard that the recently announced Federal Budget included a proposal to increase the capital gains inclusion rate as of June 25th, 2024. The capital gains inclusion rate determines how much of a realized capital gain is taxable, and has been set at 50% since the year 2000 – for instance, if you sold a property for $200,000 that had a cost base of $100,000, your total gain would be $100,000 of which 50% ($50,000) would be added to your taxable income for the year.

The government has proposed an increase from 50% to 66.67% as of June 25th, which applies to all capital gains realized by corporations, and capital gains over $250,000 realized by individuals. The $250,000 threshold for individuals leaves a little more wiggle room for planning purposes on the investment side, but there are still some scenarios that could impact many Canadians. Here are some planning points to consider if you are sitting on unrealized capital gains:

  • If you hold real estate that is not protected by the Principal Residence Exemption (vacation homes and rental properties, for example), you could find yourself paying more tax if you realize a gain of more than $250,000. This isn’t a reason to panic and put everything up for sale, but if you were already thinking of selling in the near future, you may want to put the push on to get it done before June 25th.
  • If you hold a non-registered investment portfolio (this doesn’t apply to RRSPs, RRIFs, RESPs, or TFSAs) as an individual, the $250,000 threshold may allow you to avoid the higher capital gains inclusion rate. With proper planning you could likely keep your capital gains under the threshold each year, but there are some things we can’t plan for – an estate, for example, could end up paying tax on the higher inclusion rate, therefore eroding the value that’s left for the beneficiaries. Also, if you were holding onto unsuitable investments in your portfolio purely to avoid triggering the capital gain on moving them, now might be the time to revisit this.
  • If you hold investments within a corporation you won’t get to avail of the $250,000 threshold for the 50% inclusion rate – all of the corporation’s capital gains will be subject to the new inclusion rate of 66.67% after June 25th. If you were planning to sell any holdings or rebalance your portfolio, or if you need to withdraw from your investments for cash flow, you may want to look at doing this now.
  • Although it’s a good idea to look into some planning, it’s important to note that doing nothing is still an option. If you have a large unrealized gain but didn’t already have plans to sell your asset or withdraw from your portfolio, you may decide that your best strategy is to trickle this out over the years. If you factor in the benefits of growing and compounding your investment over time, it may not make sense to pay the tax upfront just to avoid the higher inclusion rate.

There’s no “one size fits all” solution to dealing with the new proposed inclusion rate – as mentioned, the answer may be to simply do nothing. If you have concerns about how this may affect you, talk to your advisor about how you can prepare for the increase.