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Ask an Accountant: The Real Impact of the 2024 Capital Gains Tax

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The capital gains tax increase has left a lot of Canadians concerned about the impact it will have on their bottom line – for good reason.

Disclaimer… blogs are supposed to be neutral, and the writer should focus on the facts and nothing but the facts.  I need to get something off my chest so I will deviate from the norm and give what has now become a popular opinion. – Manu Shandal, CPA

The new 2024 capital gains tax was introduced as a mechanism of taxing the rich and we were told the common Canadian will remain unaffected.  Now that the dust has settled, and the facts are out we know this is far from the truth.  This rule which was meant for “1%” will impact most Canadians. Now back to the facts…

Practical implications of the capital gains tax

In case you’re wondering the Capital Gains tax increase goes into effect on June 25, 2024.

 

2.7 million people out of a working population of ~25 million are self-employed.  Many entrepreneurs hope to fund their retirement in whole or partial through the sale of their assets.  The first $250k of the capital gain is tax exempt by 50%, the capital gain after the initial $250,000 is only 33% tax exempt.  The 16% increase in tax can be a significant chunk of money which can leave an incumbent with no choice but to work an extra year, or two or reduce their quality of life.

Capital gains tax increase places unfair burden on Canadians

Many Canadians are not classified as entrepreneurs but have invested their life saving in investment properties have also been rattled from the drop in home prices, increase in interest rates, and tenant laws which are not in their favour, and if that wasn’t enough the government has added some extra taxes for these Canadians to deal with.

 

A Henson trust designed for individuals with disability has not been excluded from the capital gains tax increase.  A healthy Canadian can bite the bullet and work a little longer to offset the increase in taxes, but to penalize someone who is already at a disadvantage is extremely unethical and embarrassing.

 

At the time of death, the number of Canadians impacted by this rule will grow each year due to inflation.  For the finance minister to say this will only impact the pockets of the top 1% is a blatant lie.

Canada's economic decline and G7 status at risk

The Canadian GDP at one point used to be in the top 7.  In 2024 the GDP has dropped to 10th place and is projected to drop even further.  Canada is growing at 1.2% and #11 Russia is growing at 3.2% and #12 Mexico is growing at 2.4%.  There are now whispers of excluding Canada from the G7 because Canada is no longer relevant on the global stage.

 

This is what Canadians are dealing with in the current environment.  2025 is a big year for all Canadians, chose wisely.

 

The obvious question is, what can we do?

First off, before you sell your business speak to an accountant to take advantage of the $1M capital gains exemption.  An accountant along with the right team of professionals can help put back over $200k of tax dollars in your pocket by properly structuring your company and the sale of your company.

 

Secondly, if you as a taxpayer structure the contract in such a way that the proceeds on the sale of a property in the year of sale may defer the tax associated with the gain over as many as five years (10 years for certain property) using the capital gains reserve. In most instances, taxpayers claim at least 20% (10% for certain property) of the gain annually during that period.

 

The amount actually paid to the seller must be claimed in a year, so the seller can claim the reserve only if the terms of the deal provide for deferred payment. However, even if payments are staggered, a seller could choose to pre-pay the tax on the gain by not claiming the reserve.

 

It is strongly advisable you speak with an accountant.  In sports the saying is defence wins championships, if you want to be a champion as an entrepreneur always be proactive as opposed to reactive.  Cause we live by the mantra it all starts with a simple conversation…

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