Let’s consider the implications of the new capital gains tax inclusion.
Scenario: Muskoka Cottage
An elderly woman owns a cottage in Muskoka. She inherited it from her parents. Her principal residence exemption is in use, so she will have to pay taxes. Here are the relevant numbers:
- $100,000 on 1 January 1972
- $1,100,000 on the date of death (principal residence exemption not available)
- $1,000,000 capital gain
- $500,000 taxable capital gain
- $250,000 tax payable
- Only income, $6,000 in OAS (usually no taxes payable)
- Final tax year $3,000 paid in taxes on OAS amount
- Her income in the year, usually being $6,000 is now $506,000, meaning that at a 50% tax rate she will pay $253,000 in taxes. Effectively, the government will scoop back half of her Old Age Security.
The NEW Rules
- $100,000 on 1 January 1972
- $1,100,000 on the date of death (principal residence exemption not available)
- $1,000,000 capital gain
- taxable capital gain
- now inclusion is 2/3rds of the capital gain subject to exemption of first $250,000 for individuals
- For corporations and other entities, full 2/3rds, no exemption
Computation of Taxes under the New Rules
- $1,000,000 capital gain
- Inclusion in Income
- First, $250,000 : 50% or $125,000
- Next, $750,000: 66.66% or $525,025
- Total taxable gain for inclusion in income in the year of disposition: $650,025
- At 50% tax rate, the taxes payable will be $325,012.50
- Additional Taxes: $75,012.50
Considerations
- Additional Taxes: $75,012.50
- Computation based upon 52 years of ownership
- 52 years of financial estate planning expecting $75,012.50 less
- Preferred Introduction and Integration
- New rates start effective 26 June 2024 based on current values
- but this is not the case
Protect the Muskoka Gain
- Consider an estate freeze
- Consult with a tax lawyer
- Ensure that Land Transfer Taxes are not applicable
- Restriction if there is a mortgage in place
- Opportunity limited until 24 June 2024
COMMENT
While this new system may seem unfair there is a short window of opportunity to avoid its imposition.
Why is part of the gain already exempt?
That’s basically due to inflation! There was no real gain, just a run up in the valuation numbers. So, the Federal Government concluded that a 50% exemption would make sense. Going forward, it’s 1/3rd.
So, act quickly if you wish to limit the impact.
Brian Madigan LL.B., Broker