How to navigate changes to the capital gains tax

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Recent changes to the capital gains tax are shaking things up for investors and business owners, prompting many Canadians to take a closer look at their financial strategies.

On June 25, the capital gains inclusion rate increased from 50 to 66.7 per cent on capital gains over $250,000 for individuals and from the first dollar for corporations. That means for every $1,000 in capital gains after $250,000, Canadians must pay $667 in taxes.

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The announcement has caused anxiety and uncertainty for many investors, property owners and business owners. Higher taxes may affect the sale of investments and other capital property that is eligible for incur capital gains. This change may also impact retirement and estate planning, especially for doctors and other incorporated professionals, who may now face a different scenario when it comes to selling their business.

To help navigate some of these changes, Mike Zhang, an investment advisor at BlueShore Financial, explains how investors and business owners can adapt.

1. Track expenses and losses carefully

It’s more important now that investors manage their portfolios in ways that are mindful of the new capital gains taxes, Zhang says. Tracking qualified expenses and losses can offset your profits and lower your tax bill.

For instance, let’s say you bought a cottage for $100,000, spend $500,000 on renovations and then sell it for $1 million. You can deduct the $500,000 in renovation costs to the capital gains so that you’re only paying tax on $400,000. This scenario only applies if you’ve tracked those renovation expenses properly.

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Management, legal and administration fees are all qualified expenses that can be deducted from capital gains to reduce how much you’ll have to pay in taxes.

2. Explore opportunities to generate and capital loss

It’s time to take a closer look at capital losses. In another scenario described by Zhang, your advisor may recommend selling some of your underperforming investments to generate a capital loss. This can then be used to offset any realized capital gains from the last three years. And if you don’t have any capital gains this year, this capital loss can also be carried forward indefinitely to offset any future capital gains.

3. Max out tax-advantaged accounts

Investors should make the maximum annual contribution to all their tax-advantaged savings accounts, such as their tax-free savings account (TFSA) and registered retirement savings plan (RRSP), Zhang says. With the TFSA, you won’t be taxed on any withdrawals made from the account. With the RRSP, your contributions will be deducted from your annual income tax. In both accounts, investors won’t have to pay tax on any investment income, including capital gains.

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“I highly recommend people pay more attention to those tax-advantaged accounts and use those accounts to save assets for your retirement, or if you eventually want to transition the money someone else,” he says.

Zhang says it’s also important to name the beneficiaries on these accounts. While this won’t complete your children from having to pay capital gains, it would allow them to bypass the probation process and associated fees.

4. Take another look at life insurance

Life insurance can help maximize your legacy to your beneficiaries by funding the estate’s tax liabilities, according to Zhang.

When your estate is transferred to your beneficiaries, any increase in valuable assets will trigger increased capital gains taxes. Without assistance from life insurance, your beneficiaries may have to sell off some of your investments or properties to foot the tax bill.

“The life insurance and death benefit can pay part or even the full tax bill, so you can maximize your legacy left over to your beneficiaries,” he says.

This applies to businesses, too. In addition to covering taxes upon the death of the business owner, life insurance can also include an investment component. Over time, the value accumulated through the investments can equal the insurance premiums paid. If the policy is terminated before needed (before the owner dies), the cost of the insurance can potentially be covered by the increase in the value of the investments.

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As the new capital gains legislation comes into effect, more is being learned about the impact — and how to minimize the impact. Zhang’s final piece of advice: don’t go it alone. Seek input from a qualified advisor to ensure the assets you’ve worked so hard to create and build are protected.

BlueShore Financial is a BC-based financial institution that helps clients take a proactive approach to their finances, through customized solutions, expert advisors and a dedication to long-term client relationships. To learn more about BlueShore Financial, visit their website or one of their branches throughout the Lower Mainland and Sea-to-Sky region.

This story was created by Content WorksPostmedia’s commercial content division, on behalf of BlueShore Financial.

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