The 2023-24 Federal Budget, "A Made-In Canada Plan," delivered by Finance Minister Chrystia Freeland on March 28, 2023 may have left an unintended "window" for taxpayers. Although the capital gain inclusion rate remains at 50%, there is speculation that it may increase upon the release of the next Federal Budget.

Crowe MacKay's tax advisors explore what a capital gain is, the potential increase of the capital gain inclusion rate, how investors could be impacted and their options. If you require assistance, connect with us in Alberta, British Columbia, Northwest Territories, or the Yukon.

What is a Capital Gain

Capital gains usually arise when you sell a capital asset for a profit. Capital assets could include shares, bonds, real estate, and mutual fund units. In simple terms, capital gains are determined by taking the difference between the proceeds of disposition ("POD") and the adjusted cost base ("ACB") of the asset while deducting the expenses and outlays incurred on the sale.

For a very simple illustrative example, if you sold 100 shares of TD Bank for $90 per share (your proceeds of disposition is $9,000), which cost you $60 per share (your adjusted cost base is $6,000), then the resulting capital gain is $3,000 (that is $9,000 (POD) less $6,000 (ACB)). Given that the current capital gain inclusion rate is 50%, then $1,500 is subject to tax at your marginal tax rate.

The province you reside in and your income level impacts your marginal rate.

Some tax strategies could include the following:

  • For an asset to be sold in the near future - setting up a holding company (Hold Co.), selling an asset to the new Hold Co., and triggering a capital gain at your discretion as a result of this transaction
  • Inter-generation and estate plans involving the transfer of assets - triggering capital gains now on the sale (or gift) of an asset(s) to an adult child (or some combination of gift and sale)
  • Sale of real estate - consider an appropriate closing date in 2023 rather than deferring it to next year

Will the Capital Gain Inclusion Rate Increase?

Over the past couple of years, there has been speculation in the tax community that the capital gain inclusion rate of 50% may increase. Historically, rates have been as high as 66.75% and up to 75%. Depending on which province you live in, at present, the top personal marginal tax rate will vary from a low of 24% for an Alberta resident to 26.75% in British Columbia (incidentally, the top personal tax rate on capital gains for Newfoundland and Labrador is the highest in the country at 27.40%).

If the capital gain inclusion rate changes are announced in the next Federal Budget, it could be effective on that Budget Day. Over the past few years, the Government has implemented tax measures targeting tax planning strategies primarily used by high net worth individuals and their corporations. Therefore, individual investors should consider this as a signal to re-evaluate their portfolio and tax planning given that the 'profit window' could narrow soon.

Investors might want to re-consider their tax planning. Instead of just rebalancing a portfolio and recognizing gains now, you can incorporate slightly more sophisticated tax strategies that could leverage time now versus reacting on (or after) Budget Day and being too late.

Some tax strategies could include the following:

  • An asset to be sold in the near future - setting up a holding company, selling an asset to it, and triggering a capital gain as a result of its sale
  • Inter-generation and estate planning - triggering capital gains on the sale of an asset to an adult child and / or a gift
  • Sale of real estate - consider an appropriate closing date

It is always best to contact a trusted Crowe MacKay advisor to discuss these issues along with potential tax planning tailored to you in an effort to minimize your tax exposure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.