Reassessing Your Capital Gains Strategy: Adapting to the 2024 Tax Changes

Disclaimer: The CRA has reversed its position on collecting the increased capital gains tax before formal legislation is passed. While the information below was accurate at the time of writing, investors should stay informed about ongoing developments. Read more ->https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2025/update-cra-administration-proposed-capital-gains-taxation-changes.html

Starting June 25, 2024, significant changes to the capital gains tax rules in Canada are reshaping the landscape for investors. The capital gains inclusion rate has increased from 50% to 66.7% for gains exceeding $250,000 annually (for individuals) and for most corporations and trusts. These changes will have a substantial impact on tax liabilities and investment strategies. Here’s what you need to know.

What Changed?

• Increased Inclusion Rate: Gains exceeding $250,000 annually are now taxed at a 66.7% inclusion rate, while gains below this threshold remain taxed at 50%.
• Affected Parties: High-net-worth individuals, corporations, trusts, and real estate investors are most impacted.

Legislation Uncertainty

Although the Canada Revenue Agency (CRA) has been collecting taxes based on the increased inclusion rate since June 25, 2024, the legislation to formally enact this change has not yet been passed. This situation arose because the federal government included the tax increase in its 2024 budget, specifying the start date. However, with Prime Minister Justin Trudeau’s resignation and the prorogation of Parliament until March 24, 2025, the future of this change remains uncertain.

If a new government opposes the increase after the next election, they may choose not to proceed with the legislation. This could result in the CRA ceasing to apply the higher inclusion rate and issuing refunds for additional taxes collected.

How Will This Impact Investors?

• Higher Taxes: Increased tax bills for large asset sales or portfolio rebalancing.
• Portfolio Adjustments: Frequent gains and high-growth assets may become less attractive.
• Trust Implications: Reduced tax efficiency for many trust structures.

Strategies to Protect and Optimize Investments

1. Use Tax-Advantaged Accounts: Shelter gains through RRSPs, TFSAs, or RESPs.
2. Harvest Losses: Offset gains by selling underperforming assets.
3. Adjust Asset Location: Place high-growth assets in registered accounts and low-growth assets in taxable accounts.
4. Reevaluate Holding Periods: Minimize turnover to defer taxable events.
5. Consider Estate Freezes: Lock in gains at current tax rates and pass future growth to heirs.
6. Maximize Deductions and Credits: Reduce taxable income by leveraging available deductions.
7. Seek Professional Advice: Tailored strategies can optimize your financial plan.

Opportunities to Explore

• Passive Investments: Shift toward dividend-paying or income-focused assets.
• Charitable Donations: Donate appreciated securities to avoid capital gains taxes while receiving tax credits.
• Real Estate Strategies: Consider holding properties for rental income rather than selling.

Plan Ahead to Stay Ahead

Adapting to these changes requires proactive planning and regular portfolio reviews. However, given the uncertainty surrounding the legislation’s future, staying informed and flexible is crucial. At First Foundation, we’re here to help you navigate these shifts and secure your financial future. Need help adjusting your investment strategy amid uncertain capital gains tax changes? Book a consultation with Tyler Pfeiffer, CFP, to plan for any outcome. Click the button below.

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Stay informed and consult with our team for personalized advice. Contact us today to learn more!