With the June 25 deadline to crystallize capital gains at the 50% inclusion rate behind us, the inclusion rate is now 66.67%. Individuals will still be entitled to a reduced 50% inclusion rate on the first $250,000 of capital gains annually, but for corporations and trusts (other than graduated rate estates and qualified disability trusts), the higher 66.67% inclusion rate applies to all gains realized on or after June 25.
In terms of real tax cost, the actual increase in the tax rate on capital gains over $250,000 is approximately nine percentage points, depending on the client’s province of residence. For example, an individual investor in British Columbia who is in the top marginal tax bracket currently pays capital gains tax of 26.75% on any capital gains under $250,000. With the new 66.67% inclusion rate, that B.C. investor is now looking at a capital gains tax rate of 35.67% on gains over $250,000, an increase of 8.92 percentage points.
Going forward, advisors should speak to clients each December not only about tax loss selling but also about annual capital gain crystallization to take advantage of the lower 50% inclusion rate on the first $250,000 each and every year. Crystallization for publicly traded shares is as easy as selling the position on the open market and immediately buying it back. And, unlike loss crystallization planning, which is generally done at year-end to realize capital losses that can then be applied against capital gains, there’s no equivalent superficial gain rule, meaning the investor doesn’t need to wait 30 days to buy back the stock on which they crystallized the gain. For stocks with losses, however, the superficial loss rule will deny a loss if the stock is repurchased within 30 days.
Whether it will make sense to crystallize $250,000 worth of gains and essentially prepay the tax for a year (generally due on the following April 30) versus paying the tax at some point in the future will depend on the client’s expected rate of return and time horizon. For example, if the tax they didn’t pay for 2024 was invested at a 6% rate of return compounded annually, it would take about eight years of growth, after-tax, to beat the tax savings payable at the lower inclusion rate.
One word of caution when it comes to crystallizations. As with all significant capital gains in 2024, the impact of the revised alternative minimum tax (AMT) rules needs to be considered. That’s because, starting this year, 100% of all capital gains must be included in the income calculation for AMT.
Finally, be sure to also reach out to your incorporated professional clients, such as doctors or lawyers, who now face a 66.67% inclusion rate from the first dollar of corporately realized capital gains. There’s now a material disadvantage of earning up to $250,000 gains in a corporation each year versus earning those gains personally. The additional tax cost ranges from 10 to 15 percentage points of tax on a fully integrated basis. Discuss whether it’s worth keeping the professional corporation in place, the answer to which will depend on a variety of factors, including the size of the deferral advantage on the corporation’s annual business income, the amount of capital gains to be realized annually both inside and outside the professional corporation, the rate of return and the time horizon.
Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.