Are you aware of the changes to the capital gains inclusion rates?
Changes are scheduled to be effective June 25, 2024
The March, 2024 federal budget included a proposal to raise capital gains inclusion rates from the current 50% to 67%. In other words, capital gains such as gains from the sale of securities, or cottages, or virtually any other capital asset currently are only half taxable, and in the future are expected to be 2/3 taxable. Principal residences remain effectively non-taxable by way of the principal residence exemption if the criteria for full exemption are met.
As an example, if Mr. & Mrs. Smith purchased a cottage many years ago for $500,000, and that cottage has now grown in value to $1,500,000, under the existing rules, each of Mr. & Mrs. Smith would report capital gains of $250,000 each (being $1.5 - $.5m) (x50% taxable) (x50% ownership percentage each). After June 24, each of Mr. & Mrs. Smith will instead report capital gains of $333,333, potentially leading to a significant increase in tax paid on the 2024 return. In addition, depending on Mr. & Mrs. Smith’s situation, the newly revamped Alternative Minimum Tax may apply.
You may be wondering whether you should sell securities or other assets that are relatively easy to liquidate on short notice in advance of June 25. The answer is that it depends – generally speaking, where you plan on liquidating assets in the short term regardless, it will be worthwhile to do so in advance of June 25. If you are planning a significant upcoming expenditure (a new car, a vacation, a wedding, etc) and you are planning on funding that expenditure by selling assets in July, it may certainly make sense to sell the assets before June 25 instead. However, where you plan to hold the assets for a long time and have no immediate cash need, it may be better to avoid triggering any tax at this time, and letting the asset to continue to grow in value without any upfront cash liability.