The 2024 Federal Budget’s proposed capital gains inclusion rate increase has created much discussion and concern for Canadians who own capital property with inherent capital gains.

The proposals provide a shortened period of time for proactive planning to manage exposure to the inclusion rate increase.

Capital gains basics

A capital gain results when you dispose of capital property for sale proceeds, net of selling costs, greater than the property’s adjusted cost base. Capital property may consist of real property, marketable securities, shares of private corporations, farming and fishing property, and other assets. You should consult with your tax advisor to determine whether the property you are disposing of is capital property.

Currently, 50% of a capital gain is included in calculating your income. This percentage is referred to as the capital gains inclusion rate. The result is known as a taxable capital gain. The 50% inclusion rate also applies to capital losses. The result is known as an allowable capital loss. Any resulting tax liability is calculated based on the net capital gain, which is the taxable capital gains minus allowable capital losses, included in your income tax return multiplied by your marginal income tax rate.

Capital gains inclusion rate history

Capital gains taxation was introduced in 1972. Before 1972, capital gains were not taxable. The capital gains inclusion rate has changed four times since it was introduced in 1972, as follows:

The capital gains inclusion rate is proposed to change for the fifth time on June 25, 2024.

Capital gains inclusion rate increase proposed in the 2024 Federal Budget

The 2024 Federal Budget proposes to increase the capital gains inclusion rate for capital gains realized on and after June 25, 2024, from 50% to 66.67% for corporations and trusts and from 50% to 66.67% on the portion of capital gains realized in the year that exceed $250,000 for individuals.

The $250,000 threshold would effectively apply to capital gains realized by an individual, either directly or indirectly via a partnership or trust, net of any:

• current year capital losses;
• capital losses of other years applied to reduce current-year capital gains; and
• capital gains in respect of which the Lifetime Capital Gains Exemption (LCGE), the proposed Employee Ownership Trust Exemption, or the proposed Canadian Entrepreneurs’ Incentive is claimed.

For individuals claiming the employee stock option deduction, they would be entitled to a 50% deduction of the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains; however, they would be provided with a 33.33% deduction of the taxable benefit above the combined limit to reflect the new capital gains inclusion rate.

Net capital losses of prior years would continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the offset capital gains. This means a capital loss realized before the rate change would fully offset an equivalent capital gain realized after the change.

Transitional rules will be in place for tax years that begin before and end on or after June 25, 2024. Two different inclusion rates will apply based on when the capital gains and losses are realized. Capital gains and losses realized before June 25, 2024, would be subject to the 50% inclusion rate. For capital gains and losses realized on or after June 25, 2024, the higher inclusion rate would apply to all capital gains for corporations and trusts and those exceeding the $250,000 threshold for individuals.

The annual $250,000 threshold for individuals is proposed to be fully available in 2024 and would not be prorated. It would apply only in respect of net capital gains realized on or after June 25.

Other consequential amendments would also be made to reflect the new inclusion rate. The 2024 Federal Budget notes that additional design details will be released in the coming months.

Taxpayers who may be affected

Generally, the proposed capital gains inclusion rate increase targets high-income individuals who realize significant capital gains each year, such as in their non-registered investment portfolios. However, the proposed capital gains inclusion rate increase may also affect individuals who may be disposing of personal use real property (other than their principal residence, such as their cottage), rental properties, shares of private corporations, and farming and fishing property, among other examples.

Individuals disposing of Qualifying Small Business Corporation shares or Qualifying Farming or Fishing Property may be able to take advantage of the enhanced LCGE proposed in the 2024 Federal Budget. However, any realized capital gain above the LCGE will be subject to the 66.67% inclusion rate once above the $250,000 threshold on and after June 25, 2024.

Perhaps most notable for individuals is the proposed increase in the capital gains inclusion rate that will apply, above the $250,000 threshold, to the deemed disposition of capital property that occurs on death. Generally, individuals are deemed to have disposed of all their capital property for fair market value in the year of death and to have realized any inherent capital gains or losses in the property at that time. Any net capital gains are included in the individual’s final income tax return at the applicable capital gains inclusion rate and then subject to taxation at their marginal income tax rate. So, for individuals with significant inherent capital gains in their non-registered investment portfolios, cottages, rental properties, and other capital property noted above, their resulting tax liability on death may increase on and after June 25^th, 2024. Therefore, you should consult with your wealth, tax, and legal advisors to review your estate planning to ensure your planning still accomplishes your goals or whether changes may need to be made, such as reviewing, analyzing, and adjusting your current life insurance coverage.

The chart below illustrates each province’s top personal marginal income tax rate for capital gains, if incurred before June 25, 2024, compared to on and after June 25, 2024. Unless otherwise specified, the top marginal income tax bracket applies to taxable income greater than $246,752 (Federal).

2024 top personal marginal income tax rates for capital gains incurred before June 25, 2024, as compared to on and after June 25, 2024

¹ The provincial top marginal income tax bracket differs from the Federal top marginal income tax bracket. It applies to income over $335,845 in Alberta, $252,752 in British Columbia, $1,103,478 in Newfoundland & Labrador, and $500,000 in Yukon.

As illustrated in the chart, if you are subject to taxation in the top marginal income tax bracket, the effective increase in the capital gains tax rate ranges from 7.42% to 9.14%, depending on your province of residence.

The chart below illustrates each province’s Canadian Controlled Private Corporation (CCPC) income tax rate for capital gains, if incurred before June 25, 2024, compared to on and after June 25, 2024.

2024 CCPC income tax rates for capital gains incurred before June 25, 2024, as compared to on and after June 25, 2024

As illustrated in the chart, for a CCPC, the effective increase in the capital gains tax rate ranges from 7.77% to 9.11%, depending on the CCPC’s province of residence.

Tax planning considerations for those who may be affected

Possibly the most significant planning consideration and opportunity you may have regarding the proposed capital gains inclusion rate increase is to realize inherent capital gains before June 25, 2024, especially if those inherent capital gains are in assets inside a corporation, where the 50% capital gains inclusion rate will not be available on and after June 25, 2024.

This may be less of a concern for trusts because they can generally distribute capital gains they realize to their beneficiaries and receive a deduction from their taxable income. The beneficiaries are then subject to income tax on the distributed capital gains. If the beneficiaries are individuals, these capital gains will be subject to the $250,000 threshold and respective capital gains inclusion rate.

There is no limit on the amount of capital gains subject to the 50% capital gains inclusion rate individuals, corporations, and trusts may realize before June 25, 2024. On and after June 25, 2024, individuals may wish to consider realizing annual capital gains up to the $250,000 threshold to take advantage of the 50% capital gains inclusion rate and to manage their annual taxable income and resulting income tax liability.

Therefore, you may wish to consider realizing capital gains in your non-registered investment portfolios before June 25, 2024, or annually thereafter up to the personal $250,000 threshold, and paying the resulting income tax liability, namely in the following example scenarios:

• you have liquidity needs in the near term, such as in the remainder of 2024 or coming years, where you would otherwise be selling assets in your non-registered portfolios for personal cash flow needs;
• you are planning a significant purchase or expense, such as the purchase of real estate, a vehicle, or a family vacation, in the near term or coming years and would otherwise be selling assets in your non-registered portfolios in order to help fund the purchase or expense;
• you and your wealth advisor typically realize capital gains annually in the regular management of your non-registered investment portfolios, specifically greater than $250,000 in your personal portfolio, and you would otherwise be buying and selling assets and realizing capital gains in the coming years regardless;
• you have health concerns or a shortened life expectancy and have significant inherent capital gains in your capital property that may be realized upon your death in the coming years.

Notably, given the draft Alternative Minimum Tax (AMT) legislation proposed to be effective January 1, 2024, you should consult with your tax advisor to discuss, review, and analyze your susceptibility to AMT on capital gains realized personally before June 25, 2024. AMT only applies to individuals and certain trusts, not to corporations.

If you own real property, such as a cottage, the ability to realize a capital gain before June 25, 2024, is not as simple as disposing of marketable securities in your non-registered portfolio. Planning for significant inherent capital gains in real property should be discussed with your tax and legal advisors. For example, if you are planning on transitioning your cottage to the next generation of family members, you could discuss with your advisors whether you could sell or gift a portion of your cottage on an annual basis to the next generation, realizing a portion of the inherent capital gain annually to manage your $250,000 threshold on and after June 25, 2024. Notably, this strategy is complex and will involve annual tax and legal advisory costs, as well as the potential of land transfer taxes, which should be reviewed, analyzed, and compared to the additional tax cost of any inherent capital gain to be realized and subject to the 66.67% inclusion rate in the future. Importantly, co-owning capital property with other individuals, especially family members, has its own considerations and implications and should be considered and discussed with your tax and legal advisors.

Of course, selling assets, realizing capital gains, and accelerating the payment of income tax earlier than you may have done so needs to be compared to staying invested or not selling the asset and ultimately paying the income tax in the future. You should consult with your wealth and tax advisors regarding your personal circumstances to review, discuss, and analyze any inherent capital gains in your capital property and before implementing any tax planning strategies.

An illustrative tax planning example of realizing a capital gain now versus in the future

If you are an individual, resident in Ontario, and subject to the top marginal income tax rate, then you will effectively pay 8.92% more income tax if you are subject to the 66.67% capital gains inclusion rate on and after June 25, 2024, as compared to if you realized the same capital gain before then.

Say, for example, you realize an inherent capital gain of $100,000 before June 25, 2024, and AMT does not apply; this would result in income tax payable of $26,770 versus $35,690 if the capital gain is subject to the 66.67% inclusion rate on and after June 25, 2024. This amounts to tax savings of $8,920; however, it comes at the cost of accelerating the payment of income tax by realizing the capital gain sooner than you may otherwise have. If you do not have to pay $26,770 of income tax now, those funds could remain invested until you have sold the asset. This assumes you or your investment advisor is not typically buying and selling assets and realizing annual capital gains in managing your non-registered investment portfolio.

Whether you may be better off triggering the capital gain of $100,000 and paying the income tax liability at a lower capital gains tax rate before June 25, 2024, as compared to remaining invested and realizing the capital gain in the future at a higher capital gains tax rate will depend, in part, on what sort of annual investment income and capital growth you may earn on that immediate tax expense. For example, say you do not trigger a capital gain and earn 5% deferred growth, compounded annually, on the $26,770 income tax expense. It would take approximately nine years of deferred growth taxed at the proposed 66.67% inclusion rate to be better off than realizing the capital gain and paying tax at the 50% inclusion rate. Understandably, this time period will depend on your rate of return, the composition of investment income, such as interest, dividends, and deferred growth, and your personal marginal income tax rate.

Generally, the higher the expected rate of return on your capital property, the less time it may take you to be better off than accelerating the realization of the inherent capital gain and paying income tax at the 50% capital gains inclusion rate. In other words, the higher the expected rate of return, the greater the opportunity cost of lost future investment growth by accelerating the realization of capital gains and paying the resulting income tax liability.

The breakeven period tax planning considerations

As highlighted in our example above, when considering realizing capital gains before June 25, 2024, you may consider the breakeven period analysis of realizing capital gains at the 50% inclusion rate versus the proposed 66.67% inclusion rate.

The below chart illustrates rates of deferred capital growth (i.e., no annual interest or dividend income, only capital gains), compounded annually, and the time required for you to remain invested to be better off realizing an inherent capital gain at the proposed 66.67% inclusion rate versus accelerating the realization of the capital gain at the 50% inclusion rate.

The below chart is generally applicable across Canada for individuals subject to the top marginal income tax rate and CCPCs subject to the passive investment income tax rate. The number of years to breakeven is approximate and should be used as a guide. You should consult with your tax advisor to discuss your circumstances and before you dispose of any capital property before June 25, 2024.

An illustrative example of the approximate number of years to breakeven if an inherent capital gain is subject to tax at the proposed 66.67% inclusion rate and not the 50% inclusion rate

As illustrated in the chart, if you could earn 6% deferred growth, compounded annually, to be taxed at the 66.67% inclusion rate upon disposition, it would take approximately eight years to be better off than realizing an inherent capital gain at the 50% inclusion rate before June 25, 2024, and accelerating the payment of income tax. In other words, the tax savings of realizing a capital gain before June 25, 2024, may be greater than the future after-tax capital growth if you were to dispose of the property before the end of the breakeven period and were subject to the 66.67% inclusion rate at that time.

Importantly, if the capital gain you are going to realize is in a corporation and you are going to distribute the after-tax capital gain proceeds as a dividend to shareholders, then further analysis will be required to assess the impacts of both corporate and personal levels of income tax on the breakeven period. You should consult with your tax advisor to discuss your circumstances before you dispose of any capital property before June 25, 2024.

In conclusion

The decision to realize or not realize inherent capital gains in your capital property before June 25, 2024, involves many factors. Your liquidity needs, investment management style, expected rates of return, capital property disposition date plans, taxable income, personal marginal income tax rate, and personal health are some of the important factors that you and your tax and legal advisors will need to consider when reviewing your personal circumstances and planning for the proposed capital gains inclusion rate increase.

You may wish to review our article: Four ways to grow your wealth tax-free in Canada.

The 2024 Federal Budget capital gains inclusion rate increase is a proposal at this time and may not be enacted into law as described or at all. Everyone’s situation is unique, and not all general tax planning opportunities may benefit every person. Speak with your own tax advisor for further discussion and analysis and before implementing any tax planning strategies.

source https://rosenbergdri.ca/updated-tax-planning-considerations-for-the-2024-federal-budget-proposed-capital-gains-inclusion-rate-increase/

Increasingly, we are seeing clients whose capacity has become a concern, which becomes apparent when they may no longer be able to understand their finances or give proper instructions. Only then do we learn of their incapacity and that their estate plan is non-existent or does not meet their current needs.

Planning ahead helps

Unfortunately, engaging in estate or incapacity planning with individuals with diminished capacity is complicated. For example, they may require or benefit from a more complex estate plan that would be difficult to understand under normal circumstances. Such strategies may be off the table when a person’s capacity diminishes. Furthermore, someone with diminished capacity is much more vulnerable to pressures from other individuals, leaving them open to financial abuse while also preventing them from agreeing to planning safeguards to protect them from that same financial abuse. Estate plans developed under these circumstances are also much more likely to be challenged later by unhappy would-be beneficiaries, claiming that the testator either lacked capacity or was unduly influenced.

In the worst-case scenario, individuals may have altogether lost the legal capacity to update their estate plan, in which case we are left trying to fill the legal void with much more onerous and less effective measures, such as a guardianship application where no Power of Attorney has been executed or where the currently named attorney cannot act.

The importance of having a plan

Having a loved one whose capacity is declining is challenging and stressful. One of the biggest hurdles to obtaining appropriate help for a person with declining capacity is simply having this conversation with that person. Often, individuals are unaware of their declining capacity, or they may try to hide it in an understandable effort to maintain their autonomy.
As difficult as the conversation is, it needs to be had. The consequences of delaying are just too severe. Individuals who no longer have the capacity to update their legal estate documents – including their Will and Powers of Attorney – will have lost the opportunity to provide for the management of their finances and their lives the way they would have wanted.

Too often, we see clients whose finances have been left unattended – taxes not filed, bills not paid, and investments left without proper management – simply because they have no one assisting them when they can no longer manage these items on their own. We have seen cases where clients have allowed an ill-intentioned individual to unofficially take over their finances because it was easier than admitting they needed structured help. Unfortunately, we have also seen families torn apart litigating over mom or dad’s finances, with this being the legacy of the parent’s final years.

We cannot overstress the importance of implementing and maintaining an updated incapacity and estate plan early on. These plans should be reviewed every 3-5 years, potentially more often as a person ages or their health begins to decline. If cognitive issues start to appear, do not delay – seek good professional help early on to ensure the best possible outcome in an undoubtedly tricky situation.

¹ Rising Tide: The Impact of Dementia on Canadian Society, Alzheimer Society of Canada (2010)

source https://rosenbergdri.ca/the-importance-of-preparing-for-diminished-capacity/

The 2024 Federal Budget’s proposed capital gains inclusion rate increase has created much discussion and concern for Canadians who own capital property with inherent capital gains. The proposals provide a shortened period of time for proactive planning to manage exposure to the inclusion rate increase.

Capital gains basics

A capital gain results when you dispose of capital property for sale proceeds, net of selling costs, greater than the property’s adjusted cost base. Capital property may consist of real property, marketable securities, shares of private corporations, farming and fishing property, and other assets. You should consult with your tax advisor to determine whether the property you are disposing of is capital property.

Currently, 50% of a capital gain is included in calculating your income. This percentage is referred to as the capital gains inclusion rate. The result is known as a taxable capital gain. The 50% inclusion rate also applies to capital losses. The result is known as an allowable capital loss. Any resulting tax liability is calculated based on the net capital gain, which is the taxable capital gains minus allowable capital losses, included in your income tax return multiplied by your marginal income tax rate.

Capital gains inclusion rate history

Capital gains taxation was introduced in 1972. Before 1972, capital gains were not taxable. The capital gains inclusion rate has changed four times since it was introduced in 1972, as follows:

The capital gains inclusion rate is proposed to change for the fifth time on June 25, 2024.

Capital gains inclusion rate increase proposed in the 2024 Federal Budget

The 2024 Federal Budget proposes to increase the capital gains inclusion rate for capital gains realized on and after June 25, 2024, from 50% to 66.67% for corporations and trusts and from 50% to 66.67% on the portion of capital gains realized in the year that exceed $250,000 for individuals.

The $250,000 threshold would effectively apply to capital gains realized by an individual, either directly or indirectly via a partnership or trust, net of any:

• current year capital losses;
• capital losses of other years applied to reduce current-year capital gains; and
• capital gains in respect of which the Lifetime Capital Gains Exemption (LCGE), the proposed Employee Ownership Trust Exemption, or the proposed Canadian Entrepreneurs’ Incentive is claimed.

For individuals claiming the employee stock option deduction, they would be entitled to a 50% deduction of the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains; however, they would be provided with a 33.33% deduction of the taxable benefit above the combined limit to reflect the new capital gains inclusion rate.

Net capital losses of prior years would continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the offset capital gains. This means a capital loss realized before the rate change would fully offset an equivalent capital gain realized after the change.

Transitional rules will be in place for tax years that begin before and end on or after June 25, 2024. Two different inclusion rates will apply based on when the capital gains and losses are realized. Capital gains and losses realized before June 25, 2024, would be subject to the 50% inclusion rate. For capital gains and losses realized on or after June 25, 2024, the higher inclusion rate would apply to all capital gains for corporations and trusts and those exceeding the $250,000 threshold for individuals.

The annual $250,000 threshold for individuals is proposed to be fully available in 2024 and would not be prorated. It would apply only in respect of net capital gains realized on or after June 25.

Other consequential amendments would also be made to reflect the new inclusion rate. The 2024 Federal Budget notes that additional design details will be released in the coming months.

Taxpayers who may be affected

Generally, the proposed capital gains inclusion rate increase targets high-income individuals who realize significant capital gains each year, such as in their non-registered investment portfolios. However, the proposed capital gains inclusion rate increase may also affect individuals who may be disposing of personal use real property (other than their principal residence, such as their cottage), rental properties, shares of private corporations, and farming and fishing property, among other examples.

Individuals disposing of Qualifying Small Business Corporation shares or Qualifying Farming or Fishing Property may be able to take advantage of the enhanced LCGE proposed in the 2024 Federal Budget. However, any realized capital gain above the LCGE will be subject to the 66.67% inclusion rate once above the $250,000 threshold on and after June 25, 2024.

Perhaps most notable for individuals is the proposed increase in the capital gains inclusion rate that will apply, above the $250,000 threshold, to the deemed disposition of capital property that occurs on death. Generally, individuals are deemed to have disposed of all their capital property for fair market value in the year of death and to have realized any inherent capital gains or losses in the property at that time. Any net capital gains are included in the individual’s final income tax return at the applicable capital gains inclusion rate and then subject to taxation at their marginal income tax rate. So, for individuals with significant inherent capital gains in their non-registered investment portfolios, cottages, rental properties, and other capital property noted above, their resulting tax liability on death may increase on and after June 25^th, 2024. Therefore, you should consult with your wealth, tax, and legal advisors to review your estate planning to ensure your planning still accomplishes your goals or whether changes may need to be made, such as reviewing, analyzing, and adjusting your current life insurance coverage.

The chart below illustrates each province’s top personal marginal income tax rate for capital gains, if incurred before June 25, 2024, compared to on and after June 25, 2024. Unless otherwise specified, the top marginal income tax bracket applies to taxable income greater than $246,752 (Federal).

2024 top personal marginal income tax rates for capital gains incurred before June 25, 2024, as compared to on and after June 25, 2024

¹ The provincial top marginal income tax bracket differs from the Federal top marginal income tax bracket. It applies to income over $335,845 in Alberta, $252,752 in British Columbia, $1,103,478 in Newfoundland & Labrador, and $500,000 in Yukon.

As illustrated in the chart, if you are subject to taxation in the top marginal income tax bracket, the effective increase in the capital gains tax rate ranges from 7.42% to 9.14%, depending on your province of residence.

Tax planning considerations for those who may be affected

Possibly the most significant planning consideration and opportunity you may have regarding the proposed capital gains inclusion rate increase is to realize inherent capital gains before June 25, 2024, especially if those inherent capital gains are in assets inside a corporation, where the 50% capital gains inclusion rate will not be available on and after June 25, 2024.

This may be less of a concern for trusts because they can generally distribute capital gains they realize to their beneficiaries and receive a deduction from their taxable income. The beneficiaries are then subject to income tax on the distributed capital gains. If the beneficiaries are individuals, these capital gains will be subject to the $250,000 threshold and respective capital gains inclusion rate.

There is no limit on the amount of capital gains subject to the 50% capital gains inclusion rate individuals, corporations, and trusts may realize before June 25, 2024. On and after June 25, 2024, individuals may wish to consider realizing annual capital gains up to the $250,000 threshold to take advantage of the 50% capital gains inclusion rate and to manage their annual taxable income and resulting income tax liability.

Therefore, you may wish to consider realizing capital gains in your non-registered investment portfolios before June 25, 2024, or annually thereafter up to the personal $250,000 threshold, and paying the resulting income tax liability, namely in the following example scenarios:

• you have liquidity needs in the near term, such as in the remainder of 2024 or coming years, where you would otherwise be selling assets in your non-registered portfolios for personal cash flow needs;
• you are planning a significant purchase or expense, such as the purchase of real estate, a vehicle, or a family vacation, in the near term or coming years and would otherwise be selling assets in your non-registered portfolios in order to help fund the purchase or expense;
• you and your wealth advisor typically realize capital gains annually in the regular management of your non-registered investment portfolios, specifically greater than $250,000 in your personal portfolio, and you would otherwise be buying and selling assets and realizing capital gains in the coming years regardless;
• you have health concerns or a shortened life expectancy and have significant inherent capital gains in your capital property that may be realized upon your death in the coming years.

Notably, given the draft Alternative Minimum Tax (AMT) legislation proposed to be effective January 1, 2024, you should consult with your tax advisor to discuss, review, and analyze your susceptibility to AMT on capital gains realized personally before June 25, 2024. AMT only applies to individuals and certain trusts, not to corporations.

If you own real property, such as a cottage, the ability to realize a capital gain before June 25, 2024, is not as simple as disposing of marketable securities in your non-registered portfolio. Planning for significant inherent capital gains in real property should be discussed with your tax and legal advisors. For example, if you are planning on transitioning your cottage to the next generation of family members, you could discuss with your advisors whether you could sell or gift a portion of your cottage on an annual basis to the next generation, realizing a portion of the inherent capital gain annually to manage your $250,000 threshold on and after June 25, 2024. Notably, this strategy is complex and will involve annual tax and legal advisory costs, as well as the potential of land transfer taxes, which should be reviewed, analyzed, and compared to the additional tax cost of any inherent capital gain to be realized and subject to the 66.67% inclusion rate in the future. Importantly, co-owning capital property with other individuals, especially family members, has its own considerations and implications and should be considered and discussed with your tax and legal advisors.

Of course, selling assets, realizing capital gains, and accelerating the payment of income tax earlier than you may have done so needs to be compared to staying invested or not selling the asset and ultimately paying the income tax in the future. You should consult with your wealth and tax advisors regarding your personal circumstances to review, discuss, and analyze any inherent capital gains in your capital property and before implementing any tax planning strategies.

An illustrative tax planning example of realizing a capital gain now versus in the future

If you are an individual, resident in Ontario, and subject to the top marginal income tax rate, then you will effectively pay 8.92% more income tax if you are subject to the 66.67% capital gains inclusion rate on and after June 25, 2024, as compared to if you realized the same capital gain before then.

Say, for example, you realize an inherent capital gain of $100,000 before June 25, 2024, and AMT does not apply; this would result in income tax payable of $26,770 versus $35,690 if the capital gain is subject to the 66.67% inclusion rate on and after June 25, 2024. This amounts to tax savings of $8,920; however, it comes at the cost of accelerating the payment of income tax by realizing the capital gain sooner than you may otherwise have. If you do not have to pay $26,770 of income tax now, those funds could remain invested until you have sold the asset. This assumes you or your investment advisor is not typically buying and selling assets and realizing annual capital gains in managing your non-registered investment portfolio.

Whether you may be better off triggering the capital gain of $100,000 and paying the income tax liability at a lower capital gains tax rate before June 25, 2024, as compared to remaining invested and realizing the capital gain in the future at a higher capital gains tax rate will depend, in part, on what sort of annual investment income and capital growth you may earn on that immediate tax expense. For example, say you do not trigger a capital gain and earn 5% deferred growth, compounded annually, on the $26,770 income tax expense. It would take approximately nine years of deferred growth taxed at the proposed 66.67% inclusion rate to be better off than realizing the capital gain and paying tax at the 50% inclusion rate. Understandably, this time period will depend on your rate of return, the composition of investment income, such as interest, dividends, and deferred growth, and your personal marginal income tax rate.

Generally, the higher the expected rate of return on your capital property, the less time it may take you to be better off than accelerating the realization of the inherent capital gain and paying income tax at the 50% capital gains inclusion rate. In other words, the higher the expected rate of return, the greater the opportunity cost of lost future investment growth by accelerating the realization of capital gains and paying the resulting income tax liability.

In conclusion

The decision to realize or not realize inherent capital gains in your capital property before June 25, 2024, involves many factors. Your liquidity needs, investment management style, expected rates of return, capital property disposition date plans, taxable income, personal marginal income tax rate, and personal health are some of the important factors that you and your tax and legal advisors will need to consider when reviewing your personal circumstances and planning for the proposed capital gains inclusion rate increase.

You may wish to review our article: Four ways to grow your wealth tax-free in Canada.

The 2024 Federal Budget capital gains inclusion rate increase is a proposal at this time and may not be enacted into law as described or at all. Everyone’s situation is unique, and not all general tax planning opportunities may benefit every person. Speak with your own tax advisor for further discussion and analysis and before implementing any tax planning strategies.

source https://rosenbergdri.ca/tax-planning-considerations-for-the-2024-federal-budget-proposed-capital-gains-inclusion-rate-increase/

When you think about your health, what comes to mind? For many of us, physical and mental health is top of mind, but what about financial wellness?

Research shows that physical and financial health are closely connected, and how individuals feel about their financial situation can impact their physical and mental wellbeing.

Financial wellness is defined by your relationship with money. It’s more than the numbers that show how your investments are performing. It’s the ability to meet your financial needs today comfortably, a feeling of security about your future, and the freedom to make choices that allow you to enjoy your life now and in the future.

Specifically, your financial wellness can be impacted by the following factors:

• Whether you have a plan to meet short- and long-term goals
• Ability to cover costs related to unexpected life events
• Control over day-to-day and month-to-month expenses
• Ability to borrow what you need and understand/manage your debt
• Access to the information necessary to make sound financial decisions
• Peace of mind that future generations are taken care of

Here are seven steps you can actively take to improve your financial health:

1. Have a financial plan in place

A financial plan can help you prepare for future challenges and goals. It acts like a roadmap for your financial future, balancing your short- and long-term goals to help you prioritize. These goals may include major purchases, funding your child’s education, planning for your dream retirement, leaving a legacy, or preserving wealth for your family.

At Scotia Wealth Management, we can provide you with a Total Wealth Plan that focuses on your current needs while considering future goals and implementing strategies to help you achieve them. It can provide you with a strategic understanding of the steps to take so you can envision the future with clarity, peace of mind and certainty.

2. Set aside emergency savings

It’s important to create a robust emergency fund to cover costs related to unexpected life events. Make sure you earmark a certain amount on a regular basis should something arise, like a major home repair or a family illness. A common rule of thumb is to save up to six months of living expenses to protect against sudden financial burdens. If you don’t have the funds to set aside for emergencies, having access to a low-interest rate line of credit is a good alternative.

3. Save and invest for the future

No matter what you are saving for, planning early is a key aspect of future financial wellness. The earlier you start planning, the longer your savings will have to grow and achieve your long-term goals. To prioritize saving for the future, maximize contributions to your Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA), and Registered Education Savings Plan (RESP), where your savings will benefit from tax-efficient growth and government grants (RESP). If your employer offers a group retirement plan, pension plan or an employee share ownership plan, take advantage of any contribution matching available.

4. Understand your debt situation

Having some form of debt is normal and can even be beneficial, depending on your financial situation. Total financial wellness means fully understanding your debt situation, ensuring your borrowing is tax efficient and having a holistic plan to absorb any unexpected financial shocks or increases in interest rates. If you are a business owner, having access to the right credit solutions can help you move quickly to take advantage of investment opportunities.

5. Protect your wealth through insurance

The right insurance can help protect your finances and promote peace of mind. Should the unfortunate happen, insurance can help protect your family and business from financial loss. You can use insurance to help minimize, defer, or offset your tax liability and gain stable projected returns for the next generation as you maximize your wealth transfer. Insurance coverage can also address family concerns that come with estate and legacy planning by helping avoid strife from dividing wealth or selling cherished assets after death.

6. Manage the taxes you pay

A proper tax plan can significantly boost your assets and overall wealth throughout your working years, during retirement, and when your assets are transferred to your loved ones. A customized Total Wealth Plan can include different strategies to discuss with your tax advisor to help reduce or defer the amount of tax you owe. It can also offer you various options designed to deliver a regular stream of tax-efficient retirement income.

7. Create an estate plan

When the unexpected happens, it is crucial to have an estate plan in place to protect your family, your loved ones, and your assets. Creating an estate plan is so much more than just a will. It can help you plan for care in the event of a critical illness and ensure your wealth is preserved and properly transferred to your loved ones tax-efficiently. The key components of estate planning include preparing a will, tax planning, establishing Powers of Attorney, charitable giving considerations and insurance solutions.

Like physical or mental health, financial wellness is an ongoing journey. You need to take consistent and intentional steps toward the goals you want to accomplish in order to achieve total financial wellness. In the same way that individuals use a personal trainer to help them develop an actionable health and fitness plan, a Scotia Wealth Management relationship manager can help you create a Total Wealth Plan that will provide you with a roadmap to address your immediate needs, your goals for tomorrow, and your future aspirations.

source https://rosenbergdri.ca/seven-steps-to-improve-your-financial-health-now/

A good retirement plan aims to find a balance between maximizing life enjoyment and alleviating fears about running out of money in old age. And the fact that Canadians are living longer puts an even greater emphasis on a sound retirement plan.

Retirees want to know how much they need to save in order to live a comfortable lifestyle. They also want to know whether their savings are enough to last a lifetime. These questions would be easier to answer if we knew how long we expected to live.

A good retirement plan aims to find a balance between maximizing life enjoyment and alleviating fears about running out of money in old age. And the fact that Canadians are living longer puts an even greater emphasis on a sound retirement plan.

But how do you estimate your lifespan if you don’t have a crystal ball to see into the future? Luckily, there are tools: FP Canada issues assumption guidelines for financial planners to use for long-term projections. They suggest using a “projection period for clients where the probability of outliving their capital is no more than 25%.”

For instance, a 55-year-old male today has a 25% chance of living to age 94, while a 55-year-old female has a 25% chance of living to age 96. That means planning for a 30- to 40-year retirement.

Indeed, retirement expert Fred Vettese recently shared a chart of 1,000 Canadian women aged 65 today, and more than half were expected to be still alive at age 90.

The bottom line: Canadians are living longer and need to plan to address the longevity risk in retirement. Here are six enhancements to your retirement plan that can help improve the odds you won’t outlive your savings:

Delay CPP and OAS

Canadians can take their Canada Pension Plan (CPP) benefits as early as age 60 or as late as age 70. Taking CPP at age 60 results in a permanent 36% reduction in your expected benefits versus waiting until age 65, while deferring your CPP to 70 results in a 42% increase in your benefits. CPP was designed to replace about 25% of your pre-retirement income, and a recent enhancement to the plan will bring that replacement rate up to 33% by 2065.

Old Age Security (OAS) can be taken as early as age 65 or as late as age 70. Deferring your OAS to 70 results in a 36% increase in your benefits. OAS is designed to replace about 15% of your pre-retirement income.

These valuable income streams are guaranteed, paid for life, and indexed to inflation. For context, CPP recipients in 2023 received a 6.5% increase in their benefits due to higher inflation in 2022. OAS payments are adjusted quarterly, with a total increase of 7.0% for the year.

Think of deferring CPP and OAS as longevity protection. You’re locking in an enhanced, inflation-protected benefit that will be paid for life, whether you live to 85 or 105.

Buy an annuity

An annuity is a contract with an insurance company that typically pays a guaranteed income stream for life. You can also purchase a “term-certain” annuity that guarantees an income for a set number of years.

You can purchase an annuity inside your RRSP or RRIF or in a non-registered (taxable) account.

The income you receive from an annuity largely depends on your age (and life expectancy) and the current interest rate environment. Higher interest rates lead to higher annuity payouts and vice-versa.

Keep in mind most annuities don’t offer inflation protection, so you’ll receive the same amount each year.

As for the right time to buy an annuity, consider the following comments from Mr. Vettese:

“The ideal time to buy an annuity is at the point that short-term inflation has peaked and starts dropping, but just before interest rates start falling to reflect it.”

Tap into home equity

The equity in your home may represent your largest asset in retirement. While most retirees want to remain in their homes as long as humanly possible, tapping into your home equity in retirement can allow retirees to spend more for longer.

The classic way to access your home equity is to downsize into a smaller home. This makes sense, intuitively, because empty nesters don’t necessarily need to live in the larger family home in which they raised children. Downsizing to a condo or smaller detached home can unlock home equity while maintaining quality of life.

Selling your home and renting is another option, especially in advanced years when seniors may consider moving to a retirement home.

Finally, retirees with a lot of home equity but little in the way of savings may consider a reverse mortgage as a way to increase income without having to sell their homes. A reverse mortgage allows a homeowner to borrow up to 55% of their home equity, either through a lump sum or smaller payments over time.

Consider variable spending

Retirees should be flexible with their annual spending needs to ensure their money lasts a long lifetime.

Consider setting a spending floor that allows you to live a comfortable retirement regardless of market conditions and a spending ceiling that allows you to safely increase your expenses during years of strong investment returns.

Turn your spending up or down like a dial based on your portfolio performance and how well the broader economy is holding up.

For example, a retiree who planned on building a garage might have put the project on hold when lumber prices doubled during the pandemic. A similar situation is occurring in the new and used vehicle market — with prices so high, some retirees are waiting to replace their vehicles. Flexible retirees plan for and then adjust the timing of large purchases as needed.

A detailed retirement plan can give you an approximate idea of how much you can safely spend without running out of money by age 95, using conservative investment return assumptions. Barring any market calamities, retirees can then feel confident in spending up to their ceiling during normal to strong market conditions.

Take a “Victory Lap Retirement”

Coined by authors Mike Drak and Jonathan Chevreau, a “Victory Lap Retirement” refers to a period when you transition from full-time work to part-time work (or semi-retirement).

Perhaps you’re not quite ready for a full-stop retirement. Your victory lap may be a transition to working two to three days at the same organization, consulting back to the same organization or industry, working in a completely new field, or starting a business.

The point is that transitioning to retirement can be a challenge for many who felt a strong sense of purpose from their work or who enjoyed the fulfillment and socialization that comes from working in an organization.

A victory lap can help ease that transition, with the added benefit of boosting your retirement savings.

Give (carefully) with a warm hand

Retirees with more than enough resources to meet their spending needs and last a lifetime may not want to wait until they are 90 or 95 to leave behind a large estate to their children. That makes sense, given that your adult children may already be retired by that point and secure in their finances.

Indeed, it’s why many retirees now consider giving smaller, early inheritance gifts to their adult children at opportune times in their lives. It could be tied to hitting milestones, such as graduation, marriage, a first home purchase or starting a family. Financial aid could include helping children contribute to their tax-free savings account (TFSA) or to the new first home savings account (FHSA), providing a lump sum gift to help top-up a house down payment, or even funding registered education savings plans (RESPs) for the grandkids.

It’s important to give carefully in the context of your retirement plan (see point #4 about variable spending) and understand where the funds are coming from. You want to ensure any gift you offer doesn’t impact your own retirement plan.

Final thoughts

Canadians are living longer and need to consider the impact of longevity on their finances and retirement plans.

Too many retirees still focus on average life expectancy without acknowledging that 50% of people will live longer than the average. Indeed, we should be planning as if we’ll live to at least 90 or 95 and make financial decisions accordingly.

Shore up your guaranteed income by deferring CPP and OAS to age 70 and buying a life annuity with excess funds in your RRSP, RRIF, or non-registered account.

Consider tapping into your home equity, if needed, to increase your savings and investments.

Find a range between a comfortable spending floor and a safe spending ceiling that allows you to live your best life in retirement without feeling anxious about running out of money.

Take a victory lap retirement as you transition from full-time work to full-time leisure.

Finally, give with a warm hand to your loved ones if you have more than enough resources to support you in retirement.

source https://rosenbergdri.ca/canadians-are-living-longer-how-does-that-impact-my-retirement-savings/

When it comes to saving for retirement, planning ahead for health-related expenses may be key to financial stability and success.

By 2030, it is predicted that close to one in four Canadians will be a senior,¹ and chronic conditions will be prevalent in more than 90% of the population over age 65. While we enjoy the privilege of a strong, publicly funded healthcare system here in Canada, longer life expectancies, the need for long-term care, and additional health-related costs can significantly impact your retirement savings and lifestyle.

Here are some tips on anticipating health-related expenses and ensuring your financial plan does not underestimate them. Planning ahead to cover these costs will allow you to balance your health and financial priorities in retirement.

Start with a strong foundation for your retirement plan

At its core, proper planning can ensure that your transition into retirement is a positive one without financial stress. Creating a Total Wealth Plan requires you to be realistic about estimating your income and expenses across all stages of your retirement.

During your retirement, income typically comes from these primary sources:

1. Government benefits, including the Canada/Quebec Pension Plan and Old Age Security;
2. Employer-sponsored pension plans, group RRSPs and/or stock option plans;
3. Individual savings and investments, including RRSP/RRIFs, TFSAs, real estate, non-registered investments, and savings; and
4. Self-employment or employment income from an encore career or passion project.

Income projections usually anticipate changes in your spending as you age, with assumptions for inflation and investment returns.

Unfortunately, too many plans overlook your retirement goals. Meaningful discussions should take place about your vision for your lifestyle as a senior and any related health considerations—all of which will impact your expenses. A Total Wealth Plan considers your vision of retirement, including health considerations and potential costs relating to health care.

Recognize the real impact on women

Women face unique challenges in our aging population. Female seniors require more resources over retirement as they are likely to live longer. Furthermore, impacting their capacity for savings is the gender wage gap and the fact that females often take temporary unpaid or reduced pay leave from the workforce to assume responsibility for child-rearing or senior caregiving. Women’s wealth accumulation may also be affected as women have lower financial literacy scores and less confidence in making financial decisions.³ This literacy gap is more pronounced among seniors who may become responsible for financial matters for the first time upon the death of their spouse.

Lastly, women at any age are more likely to develop Alzheimer’s disease,⁴ and Multiple Sclerosis is three times more common in women.⁵ Living with a critical illness can also result in higher healthcare costs.

Anticipate healthcare-related expenses

No matter your age or lifestyle, everyone has out-of-pocket healthcare expenses. Healthy lifestyles, age and genetics, can impact these costs, and these expenditures can become significant throughout a lifetime.

Assuming provincial health care plans will fully pay health-related costs, these programs may only cover some of the costs for prescription drugs and long-term care facilities. Provincial coverage varies widely for prescription drugs and restricts the types of medications that will be covered. Consequently, it should be assumed that the government will not reimburse certain drug costs. More likely, specialized treatments, private nursing or specialized residential care facilities will be out-of-pocket expenses. Examples of costs that should ideally be planned for include health insurance premiums, dental services, naturopathic treatments, wheelchairs or other transportation devices, hearing aids, home renovations required to accommodate a disability, in-home companionship or care, and specialized vehicles.

Retirees who are increasingly concerned with funding the cost of care may have good reason to be worried. Healthcare costs are predicted to double from 2011 by 2031,⁶ making it essential to contemplate their impact on your retirement plan.

Investigate insurance options early

Workplace health and dental coverage typically end at retirement. However, some retirees have ongoing coverage paid by their employer or the option of continuing coverage at their own expense.

It is important to understand the available coverage to make an informed decision on health insurance. Prescriptions, paramedical services, vision care, and dental care are often options, but there may be limits to annual or lifetime coverage. In addition, pre-existing conditions before purchasing the coverage may be exempt entirely from the benefits.

Critical illness insurance is a type of coverage that can protect your financial health. A typical policy will cover a range of illnesses outlined in the contract; if the insured is diagnosed with one of the conditions covered, the policy will pay a lump sum, tax-free benefit after a prescribed waiting period. Having critical illness insurance ensures that, if you do fall ill, your medical concerns will not be compounded by financial ones.

When long-term care is required, the costs can be high. The average cost for a long-term care facility in Canada can range from $800 to $8,000 a month, depending on the location and type of care. Over an extended period, these costs could threaten the financial security you’ve worked hard to achieve. Long-term care insurance provides a regular benefit that can be used to pay for the care required in your home or a care facility. A benefit would become payable when the insured cannot perform a certain number of activities of daily living (ADLs) outlined in the contract. This type of protection can ensure quality care without financial stress.

Explore tax credits and deductions

Tax credits and deductions are available for individuals with disabilities, their supporting family members and caregivers. The purpose of these credits and deductions is to provide some relief for healthcare costs. Being eligible for these programs can also open the door to other federal or provincial programs, which could alleviate the pressure of expenses on your retirement savings.

Plan a successful retirement

When your transition to retirement is well planned out, it can be the most rewarding time of your life. Creating a new social network, maintaining physical activity, exploring creative discoveries and enrolling in ongoing learning all contribute to a successful evolution. But none of those endeavours will be enjoyable if you’re not feeling well. So, a retirement plan built to accommodate any healthcare and comfort measures you may need down the road can reduce stress.

Considering appropriate legal documentation, including your Will, Power of Attorney and Personal Directive for Health Care, is essential to protect you in the event of an unfortunate change in circumstances. It’s wise to work with a coordinated team of professionals who know your big picture and can ensure your wishes are articulated, documented—and honoured.

¹ Seniors, Statistics Canada Publications 11-402-X https://www150.statcan.gc.ca/n1/pub/11-402-x/2011000/chap/seniors-aines/seniors-aines-eng.htm
² Annual Report on State Public Health Canada 2010 Chapter 3 Chronic Conditions and Infectious Disease https://www.canada.ca/en/public-health/corporate/publications/chief-public-health-officer-reports-state-public-health-canada/annual-report-on-state-public-health-canada-2010/chapter-3.html
³ https://www.canada.ca/en/financial-consumer-agency/programs/financial-literacy.html
⁴ https://www.statnews.com/2019/07/16/new-clues-women-alzheimers-risk-differs-from-men
⁵ https://www.nationalmssociety.org/What-is-MS/Who-Gets-MS
⁶ Manuel, Douglas & Garner, Rochelle & Finès, Philippe & Bancej, Christina & Flanagan, William & Tu, Karen & Reimer, Kim & Chambers, Larry & Bernier, Julie. (2016) https://pubmed.ncbi.nlm.nih.gov/27822143/

source https://rosenbergdri.ca/anticipating-health-related-expenses-in-retirement-2/

On April 16, 2024, in Ottawa, Canada’s Deputy Prime Minister and Minister of Finance, Chrystia Freeland, delivered the 2024 Federal Budget (2024 Budget), titled “Fairness For Every Generation.”

The federal government has focused this year’s budget on three overarching pillars: building more affordable homes, making life cost less and growing the economy in a way that’s shared by all.

Please note that this is not a comprehensive review of the 2024 Budget. Rather, we have provided a summary of the most significant tax measures announced in the budget and the potential impact on you, your family, and your business.

Please also note that the measures introduced in the 2024 Budget are only proposals at this time and may not be enacted into law as described, or at all. You should consult with your tax and legal advisors for further discussion and analysis on how these proposals may affect your situation and before implementing any tax planning strategies.

The 2024 Budget does not contain any changes to personal or corporate income tax rates. However, it is notable that the 2024 Budget does contain a change to the capital gains inclusion rate for capital gains realized on or after June 25, 2024.

Capital gains inclusion rate

Currently, 50% of a capital gain is included in calculating a taxpayer’s income. This is referred to as the capital gains inclusion rate. The 50% inclusion rate also applies to capital losses.

The 2024 Budget proposes to increase the capital gains inclusion rate from 50% to 66.67% for corporations and trusts, and from 50% to 66.67% on the portion of capital gains realized in the year that exceed $250,000 for individuals, for capital gains realized on or after June 25, 2024.

The $250,000 threshold would effectively apply to capital gains realized by an individual, either directly or indirectly via a partnership or trust, net of any:

• current year capital losses;
• capital losses of other years applied to reduce current-year capital gains; and
• capital gains in respect of which the Lifetime Capital Gains Exemption (LCGE), the proposed Employee Ownership Trust Exemption, or the proposed Canadian Entrepreneurs’ Incentive is claimed.

For taxpayers claiming the employee stock option deduction, they would be provided a 33.33% deduction of the taxable benefit to reflect the new capital gains inclusion rate, but would be entitled to a deduction of 50% of the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains.

Net capital losses of prior years would continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the capital gains being offset. This means that a capital loss realized prior to the rate change would fully offset an equivalent capital gain realized after the rate change.

For tax years that begin before and end on or after June 25, 2024, transitional rules will apply such that two different inclusion rates would apply based on when the capital gains and losses are realized. For capital gains and losses realized before June 25, 2024, they would be subject to the 50% inclusion rate. For capital gains and losses realized on or after June 25, 2024, the higher inclusion rate would apply on all capital gains for corporations and trusts and those exceeding the $250,000 threshold for individuals.

The annual $250,000 threshold for individuals is proposed to be fully available in 2024 and would not be prorated. It would apply only in respect of net capital gains realized on or after June 25.

Other consequential amendments would also be made to reflect the new inclusion rate. The 2024 Budget notes that additional design details will be released in the coming months.

Lifetime Capital Gains Exemption

Entrepreneurial Canadians are eligible to claim the LCGE on the disposition of Qualified Small Business Corporation shares and Qualified Farm or Fishing Property. Generally, the LCGE provides for tax-free growth on the capital gain eligible for the LCGE. The amount of the LCGE is currently $1,016,836 and is indexed to inflation.

The 2024 Budget proposes to increase the LCGE to apply to up to $1.25 million of eligible capital gains with respect to dispositions that occur on or after June 25, 2024. Indexation of the LCGE would resume in 2026.

Canadian Entrepreneurs’ Incentive

The 2024 Budget proposes to introduce the Canadian Entrepreneurs’ Incentive. This incentive would reduce the tax rate on capital gains upon the disposition of qualifying shares by an eligible individual. Specifically, this incentive would provide for a capital gains inclusion rate that is one-half of the prevailing inclusion rate on up to $2 million of capital gains per individual over their lifetime. So, under the new proposed capital gains inclusion rate of 66.67%, this measure will result in an inclusion rate of 33.33% for qualifying dispositions. This measure would apply in addition to any available capital gains exemption.

The lifetime limit would be phased in by increments of $200,000 per year, beginning on January 1, 2025, before ultimately reaching a value of $2 million by January 1, 2034. This measure would apply to dispositions that occur on or after January 1, 2025.

A share of a corporation would be a qualifying share if certain conditions are met, including but not limited to the following:

• At the time of sale, the share is a share of a small business corporation and is directly owned by the individual shareholder;
• Throughout the 24-month period immediately before the sale, it was a share of a Canadian-Controlled Private Corporation and met certain asset tests;
• The shareholder was a founding investor at the time the corporation was initially capitalized, and held the share for a minimum of five years prior to sale;
• At all times since the initial share subscription until the time that immediately precedes the sale of the shares, the shareholder directly owned shares with a fair market value (FMV) of more than 10% of the FMV of all the issued and outstanding shares of the corporation and shares entitling the shareholder to more than 10% of the votes;
• Throughout the five-year period immediately before the sale of the share, the shareholder must have been actively engaged on a regular, continuous, and substantial basis in the activities of the business; and
• It was acquired for FMV consideration.

This incentive does not apply to the following: a professional corporation; a corporation whose principal asset is the reputation or skill of one or more employees; a corporation that carries on certain types of businesses operating in the financial, insurance, real estate, food and accommodation, arts, recreation, or entertainment industry; or providing consulting or personal care services.

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a parallel tax calculation that allows fewer tax credits, deductions, and exemptions than under the ordinary personal income tax rules. Taxpayers pay either regular tax or AMT, whichever is highest.

The 2024 Budget proposes to make changes to the AMT proposals that were originally proposed in the 2023 Budget. These amendments would apply to taxation years that begin on or after January 1, 2024, (i.e., the same day as the broader AMT amendments). Notable examples of these amendments include: the tax treatment of charitable donations is revised to allow individuals to claim 80% (instead of the previously proposed 50%) of the charitable donation tax credit when calculating AMT; and fully exempting Employee Ownership Trusts from the AMT regime.

Employee Ownership Trust tax exemption

The 2023 Budget proposed rules to facilitate the creation of employee ownership trusts (EOTs). The 2023 Fall Economic Statement proposed to exempt from taxation the first $10 million of capital gains realized on the sale of a business to an EOT, subject to certain conditions.

The 2024 Budget provides further details on the proposed exemption, qualifying conditions, and disqualifying events that may render the exemption unavailable to the individual.

If multiple individuals dispose of shares to an EOT and meet the various qualifying conditions, they may each claim the exemption, but the total exemption in respect of the qualifying business transfer cannot exceed $10 million. The individuals would be required to agree on how to allocate the exemption.

The 2024 Budget also proposes to expand qualifying business transfers to include the sale of shares to a worker cooperative corporation as defined by the Canada Cooperatives Act.

Capital gains exempted through this measure would be subject to an inclusion rate of 30% for the purposes of the AMT, similar to the treatment of gains eligible for the LCGE.

This measure would apply to qualifying dispositions of shares that occur between January 1, 2024 and December 31, 2026.

Home Buyers’ Plan

The 2024 Budget proposes to increase the withdrawal limit of the Home Buyers’ Plan from $35,000 to $60,000 from a Registered Retirement Savings Plan for qualifying withdrawals made after April 16, 2024.

The 2024 Budget also proposes to temporarily defer the start of the 15-year repayment period by an additional three years for participants making a first withdrawal between January 1, 2022 and December 31, 2025, such that the 15-year repayment period would start the fifth year following the year in which a first withdrawal was made.

These two proposals are intended to help alleviate the pressure that Canada’s housing crisis has put on qualifying prospective homebuyers.

Disability Supports Deduction

The Disability Supports Deduction (DSD) allows individuals who have an impairment to deduct certain expenses prescribed by a physician that enable them to earn business or employment income, or to attend school.

The 2024 Budget proposes to expand the list of expenses recognized under the DSD, subject to specified conditions.

It also proposes that expenses for service animals, as defined under the Medical Expense Tax Credit (METC) rules, be recognized under the DSD. Individuals would be able to choose to claim an expense under either the METC or the DSD.

This measure would apply to the 2024 taxation year and subsequent tax years.

source https://rosenbergdri.ca/2024-federal-budget-summary/

Disability insurance protects your income when you’re unable to work due to an unexpected health event.

Chances are, you rely on your income to support your family and maintain your standard of living. If you could not work due to a disability, how would you manage monthly expenses such as rent, utilities, food, and more? Although hard to imagine, becoming disabled is more common than you think. In fact, one in three Canadians will become disabled at least once before age 65¹. What is more, the average length of disability over 90 days is 5.75 years². Disability insurance can help protect you and your family from losing income.

What is disability insurance?

If you can’t work due to an eligible illness or accident, personally owned disability insurance provides you with tax-free monthly payments that generally replace between 60% to 85% of your regular income (up to a maximum limit). These payments can be used to cover typical monthly expenses such as car and mortgage payments or extra costs incurred due to the nature of your disability. For a fraction of your income, disability insurance provides you with peace of mind that you’re able to:

• Maintain your standard of living
• Protect your savings from being depleted
• Avoid the sale of assets
• Allow yourself to keep saving for important milestones, including retirement or your children’s education fund

Not all coverage is created equal

There’s no “one size fits all” disability insurance plan. When deciding the best plan for you, it’s essential to carefully review the coverage and cost of each plan against your needs. Things to look out for include coverage exclusions and waiting periods, as well as the cost of the premiums over time and not just the initial cost. For example, some plans start with lower premiums that increase every couple of years, while others have a fixed price for the duration of the contract. It’s also important to examine how insurers define a disability. One plan might consider a disability as being unable to perform the essential duties of your job. At the same time, another could classify it as being unable to work at all, regardless of your occupation. Consulting a licensed insurance professional can help you navigate the various options and find a plan that meets your needs.

What if my employer provides coverage?

While this coverage is always welcome, it often comes with limitations and can leave you under-protected. For instance, your employer would own the policy, and you might have little to no say in the coverage you receive, and they can change or cancel it at any time. Premiums can increase annually as you age; if you were to leave your job or get laid off, coverage would automatically terminate. If your employer pays the premium for your disability coverage, the benefits you receive are taxable as income. This isn’t the case with a personally owned policy.

Why is disability insurance so important?

Your ability to earn an income is arguably one of your greatest assets. The consequences of being unable to work for an extended period could devastate you and your family and derail your financial plans. Let’s look at an example of the amount of money you could lose by becoming disabled at age 30.

Planning considerations

Disability can strike at any time. Speak to your advisor to ensure you have adequate coverage. They will work with you to help you choose the right policy and coverage level and tailor it to your occupation, income, and lifestyle needs.

¹ A guide to disability insurance,” Canadian Life and Health Insurance Association, December 2018.
² Canadian Institute of Actuaries (CIA) 86-92 Agreement Table & 2012 Society of Actuaries – Individual Disability Experience Committee Table.

source https://rosenbergdri.ca/protecting-your-greatest-asset-with-disability-insurance/

Once a business succession plan has been established, the next steps should include implementing complementary wealth management strategies, which will help to ensure the smooth transfer of your business.

Whether your business is transferred as a gift or sold to the family successors before you pass or after, insurance strategies are a cost-effective way to provide the required liquidity for a smooth transfer to cover the taxes payable by your successors, equalize the inheritance across your heirs, and potentially increase the legacy you leave.

Minimizing taxes payable by your successors

Just as life insurance is a valuable tool to cover taxes payable at death for an individual’s taxable investments, it can also be used to fund the tax liability at the business owner’s death. There are two primary ways to use life insurance to address these taxes:

Personally owned life insurance

As the business owner, your death would trigger a deemed disposition of your shares at the fair market value immediately before your death. This will create taxable capital gains on the growth of your company’s shares. The death benefit from a personally owned life insurance policy would be paid tax-free to your children, funding the tax liability they would face at the time. An advantage to your children being the named beneficiaries over the estate is that the death benefit is free of probate fees and delays and is not accessible by estate creditors’ claims.

Corporately owned life insurance

Another option to address taxes at death is to have the corporation named as the owner and beneficiary of the life insurance policy. You may find this a beneficial option as corporations generally have a lower income tax rate, and therefore, the after-tax cost of the insurance premiums is generally less than personally held insurance. At your death, your corporation would receive the life insurance proceeds. This will create the opportunity to pay a tax-free dividend to the shareholders, who can then use various methods to address the taxes.

Utilizing an estate freeze

Although this business succession strategy may be used to decrease taxes owned compared to waiting to exclusively pass on shares at death, it is a good idea to purchase enough insurance to cover the future tax liability, which your heirs will have to address. There are many options for how to structure the insurance policy’s ownership and address the taxes payable.

The proceeds from an insurance policy can also be used to keep the company going if, after your death, your beneficiaries decide that they do not want to continue with the business and choose to search for a buyer or if they wish to reorganize the management team.

Estate equalization

Not all of your children may be equally interested in carrying on the family business or have the skills necessary to manage the business. Life insurance can provide an equitable inheritance to those children who are not active in the business. If you are faced with either of these situations, likely, you will still want to treat your children fairly when it comes to leaving an inheritance.

Buy/sell agreement

Life insurance can be used as the funding vehicle for a buy/sell agreement. The plan proceeds would be paid to the business, thereby increasing the capital dividend account and allowing for tax-free capital dividends to be purchased by the surviving shareholders from the deceased shareholder.

Minors or uninterested heirs

To deal with minors or uninterested heirs, a life insurance trust can be established in your (the business owner’s) will. The trust would receive the proceeds of the plan, which in turn, could be used to buy the business interest from the estate. The trust would then administer the business interest for the benefit of the business successors. The estate would have adequate liquidity from the cash received to provide for your minor or uninterested heirs.

Retirement funding

A common concern for business owners is whether they will have enough money after the business transfer to provide for their retirement adequately. A split-dollar life insurance plan allows the business to own the death benefit and you, the retiring business owner, to own the cash value.

Maximizing the value of your estate

Corporate insured annuity strategy

Insurance can enhance the estate of business owners by reallocating a portion of your corporate fixed income assets into the corporate insured annuity strategy. This may increase your after-tax income while preserving the capital you have set aside for your estate. The strategy comprises two parts; the first involves purchasing a permanent life insurance policy, and the second involves liquidating your corporately held fixed income investments and purchasing an annuity with the proceeds. Upon purchasing the annuity, you give up all ownership of your funds in return for the guaranteed income stream. Unlike your fixed income assets, where all of the income you receive is taxable, an annuity payment is a blend of interest and a return of your original capital; as a result, on average, you pay less tax on the income you receive. The life insurance contract becomes payable upon the insured’s death; proceeds can flow through the capital dividend account as a tax-free dividend, with certain limitations, depending on its adjusted cost base.

Corporate estate reallocation strategy

Another insurance solution that may help maximize your estate is the corporate estate reallocation strategy. This strategy involves reallocating a portion of your company’s surplus cash into a life insurance policy which grows on a tax-deferred basis, and upon the death of the insured, proceeds are paid to your beneficiaries tax-free. Moving capital from a conservatively invested, tax-exposed environment to one that is tax-deferred may significantly increase the value of your estate, especially when those assets currently sit within a small business corporation or holding company.

source https://rosenbergdri.ca/business-succession-planning-with-insurance/

You’re in a great place. You’ve worked hard and invested wisely to accumulate wealth — you’ve probably maxed out your RRSP and TFSA contributions — and now you’re looking for another place to put your savings.

You may have recently sat down with your advisor and realized you have more than enough means to live comfortably, and now want to provide for the next generation. How can your money be protected but still grow — ideally in a tax-efficient way?

Enter permanent life insurance, an often-overlooked tool with several unexpected advantages for Canadians who want their money to work as hard as possible for them, now and in the future. It’s the kind of life insurance that can be just as useful for you in your lifetime, as well as help protect the people you love when you’re gone.

“It’s so versatile and can be used for so many different purposes,” says Rob McGavin, managing director of total wealth planning & insurance at Scotia Wealth Insurance Services, a full-service Insurance brokerage firm within Scotia Wealth Management. “People are surprised when we show them the powerful tax benefits of life insurance and how allocating some of their wealth to it can ultimately help them achieve their long-term goals.”

“There’s some really innovative planning you can do with it that many clients are unaware of.”

Permanent life insurance is an essential tool in wealth management.

Permanent life insurance: the basics

Before getting into that, here’s a quick life insurance overview. As you might know, there are two types: term and permanent. Term life insurance, where you pay a set premium over a period of time, typically ranging from ten to 30 years, is generally used as a way to make sure your family is looked after financially in the event of premature death. Generally speaking, term policies automatically renew up to a certain age and at pre-determined premium levels that increase over time, ultimately expiring by age 85. McGavin explains that it’s a risk-management vehicle, similar to car or house insurance, with value because of the peace of mind and protection it delivers over that coverage period.

Permanent life insurance, on the other hand, provides lifetime coverage with premiums that are initially higher than for term life insurance and is used to address capital and liquidity needs at death, regardless of when death occurs. Moreover, it can be an asset in itself, one that is part of your estate planning, but one that can also benefit you in your lifetime. “Permanent life insurance, also known as tax-exempt life insurance, goes beyond protection and is undervalued as a unique investment vehicle,” he explains, nodding to the fact that with two main kinds of permanent life insurance — whole life and universal life — you can build up a cash value in the policy which can be accessed during your lifetime or simply left to grow for the next generation.

“Permanent life insurance is a great option to consider for investors looking to incorporate more tax-efficient options into their asset mix,” says McGavin, who explains this product can be best suited for clients who recognize they are projected to save more than what is required to meet their retirement and income goals. “This is a chance to redeploy some of those excess savings into a strategy that can substantially enhance the wealth they distribute, or potentially leverage during retirement.”

It’s also often something that could be beneficial to business owners, he suggests, who want to capitalize on the wealth they’ve built up in their business, or potentially use insurance as a way to fund an eventual ownership transfer.

Intrigued? Here are six unexpected ways permanent life insurance can help your money work harder for you:

Improve investment tax-efficiency

This one’s for you if you have already taken full advantage of the two tax-free savings vehicles available to Canadians — RRSPs and TFSAs — and you’re looking for another way to grow your investments in a tax-efficient way. “Unlike a traditional investment portfolio where you pay tax on annual income, there’s generally no taxation on growth within a permanent life insurance policy,” McGavin says. (Unless, of course, you pull money out.) What your investments look like will depend on the type of permanent life insurance you get. “With Universal Life, usually you can literally build an investment portfolio within the policy, and you choose how it gets allocated,” he explains, adding it can be directed toward such things as guaranteed interest investments, or more equity-type investment options. “Whole Life is managed more like a mutual fund inside the policy, and your growth is heavily tied to the performance of the fund and results in dividends – or other credits – that are added. With either type of policy, you are able to greatly reduce your exposure to taxation as you accumulate wealth while enhancing your estate.”

Diversify your investment portfolio

As a “non-correlated” asset — a term used in the finance industry to describe anything whose value tends not to move up or down in sync with the markets, like gold — life insurance can be a hedge against unexpected world events and market volatility. “With Whole Life in particular,” McGavin explains, “it’s an opportunity to allocate your investments into something that reacts differently to market movements than the rest of your portfolio. And some of these funds are invested in a variety of interesting asset categories, such as private placements and real infrastructure, providing a further layer of diversification.”

While the product mechanics can help reduce the investment risk associated with Whole Life, it’s important to note that the policy’s cash value is guaranteed and may even grow depending on how the policy performs. “You might buy a million-dollar policy, for example, that starts with projected cash values but that’s just the starting point.”

That’s in reference to the fact that, provided premiums are paid, the policy contractually guarantees that your cash value will reach certain levels over the years and, with positive investment performance, should one day eclipse what you originally paid in premiums. “At the very least,” McGavin says, “even if there were very poor returns and the dividends or credits that would normally get applied are very low, you’re likely to have a cash value beyond even the originally guaranteed levels.”

An aside on those dividends (referred to as credits in some cases): Whole Life “dividends” are different than what you might be used to receiving when you own stocks, where capital can be lost if you reinvest it and the market tanks, for example. “With a Whole Life dividend, once you’ve received it you won’t lose it,” McGavin says. “The worst thing that could happen is that you don’t receive a dividend in a given year, but the insurance industry has a long history of consistently paying dividends.”

Provide supplemental retirement income

If you need to supplement your income in retirement, you can always draw down on the cash value of your life insurance policy, but you would pay tax on that. Instead, McGavin suggests that the cash value that’s accumulated inside your life insurance policy can be used as collateral for a line of credit, which you can draw on for income.

“You will incur interest expenses,” McGavin says, “but you’ve got your policy that continues to grow.” When you pass, the death benefit from your policy can be used to pay off the line of credit, and then whatever is remaining can be distributed to your beneficiaries.

Distribute wealth to family in a tax-efficient manner

As you might know, life insurance death benefit payouts aren’t taxable, meaning your named beneficiary will receive the entirety of what you’ve left them. With permanent life insurance, you get that benefit with the ability to potentially grow the money you want your loved ones to inherit along the way — without having to pay taxes on that growth every year either. “What it creates in terms of a projected estate value, especially on an after-tax basis, it often looks more attractive than what you would grow within a traditional conservative investment,” says McGavin, adding that this is often a major selling point for clients.

Be the basis for a charitable strategy

In a similar manner to the above, using a permanent life insurance policy to protect and grow money that’s destined for a charitable organization or family foundation can be a great strategy to maximize what you’re able to give — and benefit your estate. “When you pass away, the proceeds go to charity, which means the estate is benefiting from making that large charitable contribution,” McGavin says. “You can also do it while you’re alive, so that the premiums you pay on the policy generate a tax credit.”

Protect assets from creditors in a worst-case scenario

While it’s a scenario you hope your family will never have to face, it’s worth noting that permanent life insurance can be a creditor-protected asset. “The primary purpose of life insurance is for the benefit of your family, and that’s why the government has enabled this to be protected from creditors when it’s structured as such,” McGavin says.

He adds that permanent life insurance can be a complicated product to wrap your head around, which is why he says it’s imperative to talk this through with a qualified life insurance professional, like experts at Scotia Wealth Management. Creating substantial wealth doesn’t happen by accident, and it is equal parts hard work and careful planning — using life insurance can be a key strategic pillar.

source https://rosenbergdri.ca/six-ways-life-insurance-can-grow-your-wealth/