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Planning for a Possible Increase to the Capital Gains Inclusion Rate

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Planning for a Possible Increase to the Capital Gains Inclusion Rate NavigatorThe INVESTMENT, TAX AND LIFESTYLE PERSPECTIVES FROM RBC WEALTH MANAGEMENT SERVICES Planning for a possible increase to the capital gains inclusion rate Following the 2019 federal election, the Liberal Party of Canada formed a minority government and may be reliant on support from another federal party in order to execute on certain measures from their election platform. The support may come from the New Democratic Party (NDP), whose ideologies, particularly their social agenda, are similar to those of the Liberal Party. In their election platform, the NDP proposed to increase the capital gains inclusion rate to 75% from 50%. This has Canada speculating, again, if a hike to the capital gains inclusion rate may occur in the upcoming federal budget. The federal budget date has not yet been announced, but if a change is made in the upcoming budget, it is not known whether it would be effective immediately, be retroactive, or start at a future date. If you would like to plan Please contact us for a potential increase in the inclusion rate, the following article details for more information some planning items (not necessarily exhaustive) you may wish to consider about the topics along with your qualified tax advisor. It is important that you consult with discussed in this your qualified tax advisor to assist you in assessing the costs and benefits of article. implementing any planning strategies. History of the capital gains Inclusion Time Period inclusion rate Rate The capital gains inclusion rate is the percentage that is applied 1972 to 1987 50% to a capital gain you realize. The 2 1988 to 1989 66 /3% result, known as a taxable capital gain, is included as your taxable 1990 to February 27, 2000 75% income. The taxable capital gain 2 is subject to tax at your marginal February 28 to October 17, 66 /3% 2000 tax rates. Since tax on capital gains was introduced in 1972, this After October 17, 2000 50% inclusion rate has changed four Source: Federal legislation. times as shown to the right: 2 | RBC Wealth Management Planning ideas securities at the adjusted cost base You and your qualified tax (ACB) or somewhere between the advisor may want to consider the ACB and fair market value (FMV). following strategies (not necessarily The deadline to file form T2057 is exhaustive) assuming there is an the earliest date on which any of increase to the capital gains inclusion the parties to the election has to rate for transactions on or after the file an income tax return for the budget date. taxation year in which the transfer If in your regular occurred (generally, April 30th for review of your Consider the timing for rebalancing individuals or within six months of portfolio, you your portfolio the corporation’s taxation year). determine that If in your regular review of your If there is a change in the inclusion a rebalancing is portfolio, you determine that a rate introduced in the budget, you appropriate, and rebalancing is appropriate, and there may be able to elect to trigger the there are large are large unrealized capital gains, unrealized gain and be subject to unrealized capital consider whether to implement the 50% inclusion rate. If there is no gains, consider the rebalancing before the federal change to the inclusion rate, you can whether to implement budget date. Keep in mind that the elect to transfer the security at cost. the rebalancing trades would need to settle before the budget date. This way, any capital before the federal In addition to the initial and ongoing gains triggered from the rebalancing budget date. costs of having a holding company, would be subject to the current you must consider the advantages 50% inclusion rate. Although this and disadvantages of earning rebalancing may be appropriate investment income through a from an investment standpoint, it corporation. For example, currently does result in a pre-payment of tax the integrated tax rate for interest (albeit at a potentially lower tax rate) income, foreign income and capital and loss of tax deferral. Furthermore, gains earned through a corporation triggering capital gains tax in 2019 and paid to its shareholder is may result in increased instalment higher than the personal tax rate payment reminders from the CRA. for this income in all provinces and territories. This tax rate disadvantage If you have securities in a capital may change from year to year loss position, you may wish to defer depending on the current year’s tax rebalancing these securities until after rates and your province or territory the budget date to benefit from any of residence. Another consideration potential increased inclusion rate. is whether the investment income earned from the transferred securities Transfer appreciated securities will affect the small business limit to a holding company for your corporation. Under new You may wish to consider transferring rules, a Canadian-controlled private appreciated securities to your holding corporation (CCPC), together with company before the federal budget associated corporations, can earn date. If you do not have an existing up to $50,000 in passive investment holding company, then you must first income per year without affecting its consider the initial cost of setting small business limit. up the corporation and the ongoing tax compliance costs. In general, Also, without proper planning, there the steps for this planning strategy is the potential for double taxation involve transferring securities to the when a shareholder dies holding corporation in exchange for shares private corporation shares. First, of the corporation. A tax election there is personal tax payable on the form (T2057) must be completed and deemed disposition of the shares. filed if you are electing to transfer the Second, there is corporate tax payable RBC Wealth Management | 3 on the disposition of the company’s and capital gains (losses) from the assets and tax payable by the estate securities you transferred to them, or beneficiaries on the wind-up and the income or loss and capital gains distribution of corporate assets to or capital losses will attribute back the estate or beneficiaries. Post- to you. However, there will be no mortem tax planning strategies may attribution on future investment be considered to help mitigate the income if you elect to report the double tax burden. In addition, you transfer at FMV, trigger gains and also should also consult with your legal receive FMV consideration from your advisor as to whether this planning spouse. FMV consideration could be strategy would have any effect on in the form of cash received from your your current estate plan. spouse or even a loan receivable at the CRA prescribed interest rate. Transfer appreciated securities Before implementing this strategy If an unrealized capital to a spouse or common-law partner If an unrealized capital gain has you should seek professional legal gain has accrued in one advice regarding the potential spouse’s name alone, accrued in one spouse’s name alone, a planning strategy to transfer the application of family law and a planning strategy to appreciated securities to the other whether this planning strategy would transfer the appreciated spouse could be considered. have any effect on your current estate securities to the other plan. In addition, you should consult spouse could be Let’s assume a situation where you with your qualified tax advisor to considered. transfer appreciated securities to your determine the tax consequences for a spouse. Transfers between you and potential transfer, including whether your spouse (where both legal and there are any U.S. gift tax or estate beneficial ownership are transferred) planning considerations. are generally not taxable for income tax purposes. The default option is that Donate securities in-kind your spouse will receive the property If the above strategies are not at your ACB. However, you and your appropriate or you are unable to spouse have the option of electing to trigger a capital gain before the report the transfer at FMV. If the assets capital gains inclusion rate increases, are in an accrued gain position and then you could consider the tax the election is made, you will need to savings from charitable giving. To report the capital gain on your income encourage individuals to increase tax return. The deadline to file the their charitable giving, there is a election (there is no prescribed form) tax incentive for those who donate is the income tax return deadline for publicly traded securities. These the taxation year in which the transfer securities include shares, debt occurred, generally April 30th. The obligations or rights listed on a ACB of the property for your spouse designated stock exchange, mutual will be the FMV of the assets on the funds, interests in related segregated date of the transfer. funds and Government of Canada or provincial government bonds If there is a change in the inclusion donated to charitable organizations, rate introduced in the budget, you public or private foundations. The may be able to elect to trigger the capital gains triggered upon the unrealized gain and be subject to donation of these securities may the 50% inclusion rate. If there is no be eliminated. As such, if you have change to the inclusion rate, you appreciated securities that may be would not make an election and the subject to a higher inclusion rate security would transfer at cost. if sold, you may wish to consider donating these securities directly to As a general rule, when your spouse charity instead. earns investment income (loss) 4 | RBC Wealth Management The following table compares donating publicly traded shares directly to selling the shares and donating the cash proceeds for a resident in the province of Ontario who has taxable income over approximately $210,000 (indexed annually).
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