Accelerate Potential Capital Gain Realization?
Published: January 20, 2022 |
by: Doug S. Ewens QC Aasim Hirji JD Kenneth Keung CA, CPA (CO, USA), CFP, LLB, MTAX, TEP Kim G C Moody FCPA, FCA, TEP
There have been ongoing rumours about the Canadian government potentially increasing the capital gains inclusion rate from its current level of 50% to a higher level or changing the exemption for capital gains on principal residences. While some prognosticators have been crying wolf on this prediction for many years, there very well may be a fire brewing under this smoke cloud given Canada’s current economic predicament.
It is possible that the federal Minister of Finance could announce these changes in a Budget, many of which in recent years have been delivered in the first quarter – some as early as February. If you have substantial capital gains accrued in respect of your investment holdings or your residence (an “Accrued Gain Property”), you may want to consider crystallizing some or all of these capital gains before these potential tax changes are announced if your personal situation warrants.
While selling your Accrued Gain Properties for cash will trigger the capital gains, in many cases you may not want to actually sell these properties because you may have valid investment or personal reasons for wanting to keep them. In addition, nobody knows if these tax changes will materialize which adds uncertainty and risk to the equation.
Keep in mind that triggering the capital gain will be a taxable event, and if the feared change in tax law does not occur, such a sale of Accrued Gain Properties would result in a prepayment of a considerable amount of tax, which often is not a good thing!
Depending on your facts and personal situation, a customized plan can often be designed that will overcome the above predicament by enabling you to trigger a “disposition” of your Accrued Gain Properties before any Budget announcement but manage the taxable portion of the realized gain once the picture becomes clearer. If a change has been announced, you should be able to access the current 50% gains inclusion rate for gains inherent in your Accrued Gain Properties; however, if no change of law is announced, you should incur no tax until the Accrued Gain Properties are again sold at some future time.
As we get closer to Federal Budget 2022, there is less and less time to design and implement these strategies. If you would like to explore these and other planning opportunities, we would be pleased to hear from you. In the meantime, be careful out there!