Capital Gains – Planning Considerations

As a follow-up to our first article where we answered your burning questions related to the capital gains changes, we will now explore several related planning considerations.  

Annual Use of the $250,000 Threshold

Our first question here is always, what was your original plan without taking the tax changes into consideration? Yes, we want to be tax efficient, but this is about balancing short-term and long-term strategies.

Part of knowing whether using the annual threshold makes sense for you is understanding how many years it will take the investment to earn the same amount as the additional tax that will be incurred at a later date. This is your break-even point, or number of years.

If you were planning on selling something before the number of years of your break-even point regardless, then this strategy could make sense for you. But not always. It’s complicated and decisions work best when collaborating with your investment and tax advisors.

It is also worth noting that the decisions could change from year to year. There are many factors to be considered.

Do you have a need for the cash? Are you anticipating transactions above the threshold in the next several years, such as a property sale? Are there accrued gains in your portfolio that could cause significant tax issues at death?

Principal Residence or Secondary Property Sales

Principal residence sales remain tax-free as long as you have owned the property for more than 12 months at the time of sale.

But this Principal Residence Exemption (PRE) is now even more valuable than before due to the higher inclusion rate. Especially when you own multiple properties that are used personally.

When both properties are used personally, you have the opportunity to choose which property to designate as your principal residence. This means that if you have one property with a much larger accrued gain, you could choose to designate that property as a principal residence, using the PRE for a tax-free sale.

This strategy does mean that you would pay tax when the other property is sold so the goal would be to plan for that currently, ensuring there is cash for the tax at a later date.

Alternative Minimum Tax (AMT)

When you have significant capital gains in one year, such as a sale where you use the LCGE noted above, it is possible that AMT will kick in.

AMT is secondary tax calculation that allows fewer deductions, exemptions and credits than the standard tax calculation. It runs in the background of your tax return and when your results are looking a little too favorable, it will be applied.

Many taxpayers are often surprised when this appears since they were expecting little to no tax. Whenever you have a significant transaction, such as a business sale, it is always good to contact your tax advisor to get an accurate picture of the tax implications for your situation.

When we know what to expect in advance, we can also consider other strategies or options for recovery in future years.

Year of Death             

In the year of death, you are considered to have sold all of your assets at fair market value. If you have a non-registered investment portfolio or other properties with accrued gains, there could be a sizeable amount of tax on those deemed gains. Only the first $250,000 would be taxed at the 50% inclusion rate. The remainder would be taxed at the 67% inclusion rate.

If you have a surviving spouse, you may be able to transfer these assets at the original cost base, which would defer the gain and tax bill. But, you may also choose to transfer some of the assets at fair market value in order to use the full $250,000 limit on the final tax return.

Curious about your specific situation? Ready to start planning? That is what we are here for. Please reach out to the VR team and we would be happy to assist.

The above material is current as of September 18, 2024.

The information presented is a general overview and not intended to cover specific situations. You should consult with your professional advisors directly before taking any action.

Vertefeuille Rempel Chartered Professional Accountants LLP, its partners, employees and agents do not accept or assume any liability by anyone relying on the information presented.