<\/p>\n
The change increases the overall capital gains tax at the highest marginal rate to levels in the range of tax on eligible dividends, though the level varies by province. In fact, in six provinces, the combined corporate and personal tax from distributing both the taxable and non-taxable portion of capital gains from a corporation will exceed that of eligible dividends for those at the highest marginal rate. The change in capital gains tax rates will increase the overall tax on capital gains to levels similar to eligible dividends in six provinces for those at the highest marginal rate. The delay in implementation to July 25 provides an opportunity for advisors to adjust their clients’ portfolios to mitigate the impact of the rate hike.<\/p>\n","protected":false},"author":6,"featured_media":11135,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"Default","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[1521,6552,5101,6393,6497,4029,186,913,6862,6981,1512,3348,5292,1625,5099,2511,2464,181,1763,7913,7923,2459,2110,415,9092,7905,1295,6912,2294,1823,2753,3752,2685,95,7806,6653,2788,4304,4593,6121,9350,4843,7309,550,4054,8073,6928,89,3480,1065,9351,5680,1183,4575,5265,257,6305],"class_list":["post-11134","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-other","tag-1521","tag-access","tag-alternative-minimum-tax","tag-analysis","tag-benefit","tag-budgets","tag-business","tag-canada","tag-capital-gains","tag-capital-gains-tax","tag-cash","tag-change","tag-children","tag-construction","tag-corporations","tag-costs","tag-damage","tag-donations","tag-efficiency","tag-etfs","tag-exposure","tag-family","tag-funds","tag-government","tag-higher-taxes","tag-impact","tag-inclusion","tag-inclusion-rate","tag-income","tag-increase","tag-investment","tag-investments","tag-legislation","tag-life-expectancy","tag-liquidation","tag-management","tag-mind","tag-minimum-tax","tag-office","tag-opportunity","tag-portfolios","tag-president","tag-purchase","tag-rate-hike","tag-risk","tag-risk-management","tag-six","tag-small-business","tag-spending","tag-tax","tag-tax-efficiency","tag-tax-rates","tag-taxes","tag-turnover","tag-uncertainty","tag-vacation","tag-who"],"acf":{"keyphrase":"","keywords":"","sourceimg":"","country-category":""},"yoast_head":"\n
\nThe delay in implementation to July 25 provides a window of opportunity for advisors to adjust their clients\u2019 portfolios to mitigate the damage from this rate hike. Here are seven actions for advisors to take.
\n1. Determine which clients need to act before July 25. <\/strong>Clients affected on an ongoing basis are corporations and trusts, and individual clients who normally realize capital gains of more than $250,000 annually. Individuals planning major disbursements in the next several years (e.g., gifts to children, a vacation home purchase) may also be affected.
\nClients in special situations with possible capital gains implications need to be identified. These include individuals with massive unrealized gains who may not normally have annual capital gains more than $250,000, particularly if they have concentrated positions; clients planning major charitable donations with appreciated securities; individuals with a material change expected in their tax rates in coming years versus 2024; clients considering a major change in their strategies; individuals planning to depart Canada; or clients with a limited life expectancy. These clients will need to have their situations analyzed.
\n2. Review the cash-flow needs, income and capital sources, and tax characteristics of affected clients to quantify the capital gains that could be triggered to fund shortfalls tax-efficiently. <\/strong>For example, a professional who has routinely relied on capital dividends from their corporation to fund a sizable portion of their lifestyle spending likely has greater need to trigger capital gains before June 25 than a professional who funds their personal spending from a combination of salary and income from personal investments.
\n3. Re-evaluate the tax efficiency of the investments in client portfolios from a capital gains perspective. <\/strong>For affected clients, the tax drag associated with funds that generate elevated, recurring capital gains (e.g., a high-turnover fund with significant trading of appreciated securities) will jump significantly on June 25. As replacements, consider well-diversified, low-cost ETFs and funds with similar expected returns but that generate minimal capital gains.
\n4. Complete a \u201cdefer or sell\u201d analysis of the appreciated holdings of affected clients.<\/strong> Selling an appreciated investment before July 25 results in a pre-payment of tax (though it avoids higher capital gains tax later if the new inclusion rate remains unchanged in subsequent federal budgets). You will therefore need to measure the long-term value of deferring taxes against the benefit of realizing gains now at a lower rate. Generally, the higher the forecast return, the longer the expected holding period, the greater the unrealized gain and\/or the more tax-efficient the investment, the greater the likelihood that holding the investment for long-term deferral is the better option. A pre-liquidation, post-tax break-even analysis is the simplest comparison methodology.
\n5. Develop a plan to discuss with each client.<\/strong> Each client\u2019s cash flow, income and tax profile in conjunction with the investment tax efficiency and \u201cdefer or sell\u201d analysis will allow you to develop a disposition and repositioning plan tailored to that client. For example, clients relying on regular distributions from their corporations may now benefit from more exposure to investments that generate high eligible dividends. Sound portfolio construction, rebalancing and risk management remain fundamental to this plan.
\n6. Mind the traps.<\/strong> The new alternative minimum tax rules may apply to individuals in situations when substantial capital gains are realized. In addition, generating capital gains in a small business corporation with active business income may result in higher taxes due to the reduction in the small business deduction when adjusted aggregate investment income is above $50,000. Finally, distributing capital out of a corporation for reinvestment to access the $250,000 annual threshold as an individual can have material tax costs and probate tax implications as well as possible U.S. estate tax ramifications.
\n7. Liaise with the client\u2019s accountants and other professionals.<\/strong> The tax impact of any major recommended changes should be reviewed with the client\u2019s accountant or other professionals as needed.
\nAlthough the government has indicated the changes to the capital gain inclusion rules will proceed, the enabling legislation has yet to be enacted. As there continues to be uncertainty about many details of the proposed rules, you may wish to defer triggering material capital gains until mid-June, if feasible.
\nMichael Nairne, RFP, CFP, CFA, is president and CIO of\u00a0<\/em>Tacita Capital Inc., a private family office, and manager for TCI Premia Portfolio Solutions.\u00a0<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"