Strategies to Mitigate the Impact of Capital Gains Hike
The biggest surprise of the latest federal budget was the proposed increase in the capital gains inclusion rate. The government claimed that raising taxes on the wealthy would enhance tax fairness. Only 0.1% of Canadians will be affected, but experts warned that it could also impact some middle-class taxpayers. Are you affected? How can you avoid paying high taxes?
What is the new policy on the capital gains inclusion rate?
Realized capital gains may occur if you sell an asset, such as a home or stock. Currently, half of the profit is subject to being added to a taxpayer's annual taxable income and taxed at their marginal tax rate.
The budget proposes to increase the inclusion rate from 50% to 66.7% on annual realized capital gains above $250,000 generated by individuals, corporations, and trusts, which would be taxable, effective June 25.
Realized capital gains may occur if you sell an asset, such as a home or stock. Currently, half of the profit is subject to being added to a taxpayer's annual taxable income and taxed at their marginal tax rate.
The budget proposes to increase the inclusion rate from 50% to 66.7% on annual realized capital gains above $250,000 generated by individuals, corporations, and trusts, which would be taxable, effective June 25.
Additionally, the sale of primary residences is exempt from the new measures. However, Canadians selling a second home or rental property would be subject to the higher inclusion rate scheme.
The government stated that the tax hike would only affect a small number of Canadians with very high incomes. Next year, only 0.13% of Canadians with an average income of $1.4 million are expected to pay more personal income tax on their capital gains.
Who will be impacted?
But the question is, will only 0.1% of Canadians be impacted?
Those who own a second home and wish to sell might be affected. Canada's real estate market experienced rapid growth in the last decade. The benchmark single-family price in most Canadian cities doubled from 2013 to 2023, representing an average 86.8% increase. Thirteen of nineteen cities saw real estate prices surge to more than $250,000.
It will also impact some retirees, particularly those seeking to diversify their investments and bolster their retirement funds. Many retirees opt to divest from riskier investments and reinvest in safer options as they enter their retirement years.
Assuming nothing has changed, imagine that you are a retiree who invested CAD $30,000 in Apple stock ten years ago, and the share price increased tenfold; your capital gains today would exceed $250,000.
Ideas for Dealing with Capital Gains Increase
Faced with capital gains rate hikes, how can we navigate this change effectively?
· Utilize with registered accounts: RRSPs, TFSAs, RRIFs, and other tax-sheltered accounts remain unaffected. Investors can realize their profits through these registered accounts to mitigate the impact of higher taxes.
· Split reporting your capital gains: Monitor the timing of larger capital gains that are generated in equities. You might consider selling investments in stages. For instance, instead of reporting $500,000 in gains in a single year, you could sell and report $250,000 gains over two years.
· Diversify investments: Explore diversifying your portfolio with Canadian stocks to receive dividends. Eligible dividends are 'grossed up' by 38% before applying the dividend tax credit, helping reduce tax liability.
The proposed tax hike laws are subject to review, so it's essential to stay informed and adapt your strategies accordingly, as the situation might evolve.
The proposed tax hike laws are subject to review, so it's essential to stay informed and adapt your strategies accordingly, as the situation might evolve.
By Iriswong, moomoo Canada
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
Read more
Comment
Sign in to post a comment
