Ben Felix - Budget 2024: Capital Gains Tax is Increasing [Canada]

Short Summary

Main recommendation: Canadians with large taxable capital gains should not automatically sell before June 25 just to beat the proposed increase; the right choice depends on whether they plan to sell soon anyway or can defer the tax long enough to justify waiting. The 2024 federal budget proposes raising the capital gains inclusion rate from one-half to two-thirds on gains above $250,000 for individuals and on all gains for corporations, and gains realized before June 25 would be taxed at the old rate. Ben Felix of PWL Capital explains the change, its impact on investors and corporations, and why broader financial planning matters more than the rate alone.

Key Points

• The proposal raises the inclusion rate to two-thirds for individual gains above $250,000 per year and for all corporate gains; the top Ontario rate on individual gains would rise from 26.77% to 35.6%, and for corporate-held gains from 28.97% to 38.62%.
• Individuals keep the old one-half inclusion rate on the first $250,000 of capital gains each year, but corporations get no such allowance.
• Employee stock option deductions would fall from one-half to one-third for benefit amounts over $250,000, with that limit shared with capital gains.
• Deferring tax can outweigh selling early: for a $1.1 million asset with a $100,000 cost base held at the top Ontario rate and a 100% equity return assumption, deferral beats realizing the gain today for at least 7 years.
• Tax rate risk is a planning issue: realizing gains to use low tax brackets and taking corporate money into RRSPs, TFSAs, and RPPs can diversify tax treatment.
• Low-cost, low-turnover index funds distribute few capital gains, which helps keep taxable gains down.

Details Worth Noting

• Concrete instructions: Estimate your taxable gain as sale proceeds minus adjusted cost base (purchase price plus acquisition expenses).
• Concrete instructions: If you plan to sell the asset soon anyway, selling before June 25 (for example June 23 rather than June 26) locks in the lower rate; if not, model the tax deferral break-even using your expected return and tax rate before selling early.
• Concrete instructions: Consider realizing gains in years when you have unused low tax bracket room to reduce the eventual terminal tax bill.
• Concrete instructions: For corporations, consider withdrawing money to fund RRSPs, TFSAs, and RPPs to build tax diversification.
• Example: On a $1.1 million asset with a $100,000 cost base, tax at the top Ontario rate is about $268,000 if realized before June 25 versus about $335,000 after.
• The proposal is not yet law; the speaker says there is no immediate rush to act but that some businesses and real estate can take a long time to sell.
• The speaker notes the change hits hardest in the year of the second spouse's death, when all personal gains are realized, and affects second properties and larger portfolios.
• The speaker stresses that buying an ETF is not a financial plan; tax, estate planning, retirement, and budgeting all interact with capital gains decisions.

Bottom Line

The budget change makes timing and tax planning more important, but a rushed sale before June 25 only helps investors who would have sold soon anyway or whose deferral math favors realizing now; the rest should evaluate their specific situation first.