Yahoo Finance To sell or not to sell? Experts weigh in on triggering capital gains before June 25 change
To sell or not to sell? Canadians are contemplating this question following the federal government’s proposal to increase taxes on capital gains, starting June 25.
Under the proposed changes, the portion of capital gains to which taxes apply, known as the inclusion rate, would rise from one-half to two-thirds. For individuals, this would apply only to capital gains exceeding $250,000 in a given year, whereas all capital gains realized by corporations and trusts would be subject to the new rate.
Capital gains taxes are paid when you profit from selling certain assets, such as rental properties, cottages, businesses, and investments in accounts that are not tax exempt.
Ali Spinner, tax partner at Crowe Soberman in Toronto, says Canadians now have an “interesting opportunity” to trigger their capital gains and lock in the existing tax rate before the changes are implemented. And it’s an opportunity some of her clients, particularly those who plan to emigrate from Canada, are considering.
“I’ve had the same number of discussions with clients [about emergency departure tax planning] as I’ve probably had in my 20-year tax career,” Spinner told Yahoo Finance Canada. “This has really sped up their decision, or they’re thinking about speeding up their decision.”
While triggering capital gains before June 25 may be advantageous in some cases, experts say it’s a decision that requires careful consideration.
The No. 1 question you need to consider
The main question Canadians should ask themselves is what their timeline for selling would have been otherwise, says Aaron Hector, private wealth advisor at CWB Wealth Management in Calgary.
“If there was no tax change, would you have been likely just to carry on and continue to hold for years and years and years into the future?” Hector said in an interview with Yahoo Finance Canada. “If so, there’s some math you can run, but there’s a good chance that doing nothing is still going to be the right move.”
By accelerating a sale, you’re also accelerating the tax payment, he notes. And you’ll no longer have access to that money to invest, which comes at an opportunity cost.
“At what point would those dollars have grown larger than the future tax bill?” Hector asked.
Based on an expected growth rate of eight per cent, the “point of equivalency” would be six years, as per Spinner’s calculations. So, if you were planning to sell an asset within a shorter period of time, it may make sense to trigger the gain before June 25, she says.
Travis Koivula, senior wealth advisor at Island Savings Wealth Management in Victoria, says he’s already had discussions with a number of clients who find themselves in this position.
“Fortunately for them, their deals are closing or they’re in negotiations and they’re going to make them close before that date,” Koivula said in an interview with Yahoo Finance Canada. “There are some pretty huge capital gains on these, so there’s a lot of taxes that will be saved from going through before that deadline.”
A higher exemption rate could impact your decision
While the tax rate on capital gains is increasing, so too is the Lifetime Capital Gains Exemption. Under the current rules, Canadians can avoid paying taxes on up to $1,016,836 in capital gains when they sell small business shares, a farming property, or fishing property.
The new exemption, also effective on June 25, will be $1.25 million.
“They’re giving you a bit of bump there,” Hector said. “But then you’re exposed to the higher inclusion rate to the extent that the sale of your shares was over $1.25 million … So, it would depend on the expected sale price as to what timelines would make sense there.”
Be aware of the Alternative Minimum Tax
One reason to proceed with caution, according to Spinner and Hector, is the new Alternative Minimum Tax (AMT) rules that took effect on January 1, 2024.
AMT applies only to high-income individuals and certain trusts whose income and credits are deemed to be excessively tax efficient. Corporations are exempt. The new rules are “more punitive than ever on large transactions,” Hector says.
Among the changes, the AMT rate has increased from 15 per cent to 20.5 per cent.
“I’m a little bit worried that there are going to be some surprises coming in April 2025 when people prepare their 2024 tax return and perhaps didn’t realize that they may have been subject to alternative minimum tax,” Spinner said.
In many cases, Canadians who have to pay AMT are able to claim it back as a reduction in future tax years, Spinner notes. But if you’re selling an asset with a significant enough gain, or if you’re leaving the country, she says it could become a permanent tax.
Don’t rush into a decision
Koivula’s biggest piece of advice for Canadians?
“Don’t jump to conclusions that the best option is to sell everything.”
The government hasn’t provided all the details surrounding the new tax policies, he notes, and it’s possible the capital gains inclusion rate could change again in the future.
“You might do something where you think you’re saving on taxes, but then it ends up costing you more,” Koivula said.
There also could be ways to manage your way out of the higher tax rate, Hector adds, by triggering “bite-sized” gains over several years – rather than exceeding $250,000 in one year.
Regardless, they say it’s important to engage your accountant and wealth manager to come up with a plan of action.
Farhan Devji is a freelance journalist and published author based in Vancouver. You can follow him on Twitter @farhandevji.
