How to plan around the new capital gains tax

With the 2024 changes to capital gains tax, many clients are inquiring about how to update their planning. Understanding this tax hike is crucial to avoid overpaying Revenue Canada.

It’s a common misconception among incorporated individuals that when they and their spouse pass away, the only tax payable is on the capital gains on the investments within their corporation. This is incorrect. There are three levels of tax that may occur.

1. First, there is capital gains tax on your corporation’s shares. For instance, if you have $2M in corporate investments, your shares are worth $2M and most likely have a cost base of $1M. In this case, 66.7% of the gain is taxable as income, while 33.33% is credited to the corporations’ capital dividend account. The capital dividend account (CDA) is a notional account in the income tax act section 89(1) which tracks tax-free surpluses in private Canadian corporations that can be distributed to shareholders tax-free.
2. Second, to distribute the assets from the corporation, your corporate investments must be liquidated, resulting in capital gains on these investments.
3. Finally, when assets are distributed to your heirs, they are taxable at your heirs’ marginal tax rate. While post-mortem planning can alleviate some aspects of double taxation, insufficient tax planning may lead to a significant loss of corporate assets due to taxation.

What are the new capital gain tax inclusion rates?
– For individuals: The inclusion rate for capital gains will rise from 50% to 67% for gains exceeding $250,000 per year.
– For corporations: The inclusion rate for capital gains on corporate investments will increase from 50% to 67%.

What asset is not subject to tax?
Life insurance flows to your corporation tax-free and is distributed to your heirs tax-efficiently through your corporations capital dividend account.

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