Effective June 25, 2024, Federal Budget 2024 proposed to increase the capital gains inclusion rate from 50% to 66.7%. Individuals will have an annual $250,000 capital gains safe harbour at which the old inclusion rate will continue to apply. This change has many Canadians considering their options for triggering capital gains in their portfolio. Is now the right time, and how do you know?
A decision about whether to trigger gains varies greatly depending on the situation and the individual portfolio and investor’s profile. Some important things to consider are the tax implications, market timing, costs, holding period, expected future rates of return, costs of borrowing, as the case may be, and your own personal comfort level.
Proactive approach
With the possibility of an increasing capital gains inclusion rate, triggering gains before any changes take effect may offer tax planning advantages. It allows investors to take advantage of the current lower inclusion rate, resulting in lower overall tax liabilities. If you choose to sell assets with gains now, before any tax law changes come into effect, there is the potential to lock in the current, and presumably lower, capital gains inclusion rate. This could also provide an opportunity to rebalance portfolios and reallocate capital into other investments that better align with investors’ goals and risk tolerance.
Possible Drawbacks
There is still a level of uncertainty about whether and when such changes will occur. Drafted legislation is still incomplete meaning the final details and planning implications to the changes remain uncertain. This could lead investors to make decisions prematurely or based on incomplete information. Attempting to predict or time the market by selling assets with gains could mean you could miss out on future gains if the market continues to rise. You need to weigh the potential tax benefits of triggering the tax earlier against the opportunity cost of missing out on future market gains. Depending on other factors including future holding period and expected rate of return, you may find yourself at a disadvantage from triggering the tax earlier at the lower inclusion rate instead of letting the investments continue to appreciate on a tax-deferred basis and subject to tax at the higher inclusion rate in the future.
Lastly, you should also consider how complex it is to trigger gains in a tax-efficient manner. For example, this may cost you money, including brokerage and advisory fees. You need to weigh these potential costs when evaluating the any possible benefits of triggering gains.
Given the complexity of tax laws and the impact of the proposed changes, we recommend you consult with tax professionals or advisors to evaluate the best course of action based on your specific situation.
