3 burning finance questions about federal budget 2024

The federal government budget continues to get a lot of criticism, particularly for its decision to increase the capital gains inclusion rate for individuals, trusts and corporations to 66.7 per cent from 50 per cent. The new inclusion rate only applies past a $250,000 threshold for individuals, whereas corporations and trusts are subject to it for all capital gains.

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"If the Trudeau and Legault governments are looking to chase away investment, then they're on the right track," said Emmanuelle Faubert, an economist at the Montreal Economic Institute who wrote a study on the hike. "We already have enough trouble attracting investment as it is, and a tax hike will certainly not reverse this trend."

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But that's the future. What about the here and now, especially since there's more than just a hike in the capital gains inclusion rate? TriDelta Private Wealth financial planner Ted Rechtshaffen answers three pressing questions about action items you might need to contemplate right now.

Q: I have a cottage that has been in the family for years and has a large capital gain. We don't want to sell it, but is there anything I should be doing now?

A: One action plan you might want to look at would be to gift your property to a family member to crystallize — and pay — the lower capital gains tax on unrealized gains to date.

This is an option, but there are a few things to keep in mind:

• If the property has a mortgage or debt, it has to be disposed of at fair market value and there would be land transfer tax owing.
• If the property is debt free and is a gift, it can be given to a family member without paying land transfer tax. There is always the issue of whether the owner wants to give up legal control, and there's also the issue of family assets if there is a future problem with a son-in-law or daughter-in-law.
• The legal costs would likely be under a few thousand dollars, but it requires two lawyers, one to act for the buyer and one for the seller.
• You would still want to do an independent valuation of the property to ensure fairness for both parties.

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If you are older and have big capital gains on your cottage, it might make sense to change ownership in the next two months, effectively putting an estate freeze on the cottage value and paying the lower capital gains tax. Remember that you would still need to come up with the money next spring to pay the big tax bill.

Q: I have an investment holding corporation with meaningful unrealized gains. Should I sell the investments now or just hold them?

A: The truth is that it all depends on how long you intend to hold your asset, as well as the type of asset it is. There are some who think that the capital gains inclusion rate hike won't kick in until you have more than $250,000 of capital gains in a year, but that only applies to individuals. For corporations and trusts, it starts at dollar one.

Essentially, you are doing a break-even analysis on paying a lower capital gains tax now and being out of pocket on those taxes versus whether you would be better to hold on to that money now, but pay a higher tax rate when you eventually sell.

If you plan to hold an investment for the long term, especially if it is one that you expect to have fairly high annual returns, you might want to hold it. But in most cases, if you think you might sell in the next two or three years anyway, it would be better to sell now.

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If you want to look at your personal situation and the break-even point, check out this calculator aimed at Canadians with a corporation or trust.

Q: I have been reading that we should be more worried about the Alternative Minimum Tax (AMT) now. Should I be concerned?

A: The AMT is something that was put in place in 1986 to better ensure that people couldn't use a variety of tax tools and shelters to avoid paying tax. It is sort of like saying: Here is the rule book, but if you manage to beat the rule book, here's a new rule to cover that.

Last year's budget included changes to better target the AMT at high‑income individuals. They are now being implemented. The main changes are:

• Increasing the federal AMT rate from 15 per cent to 20.5 per cent and the basic exemption amount from $40,000 to the start of the second-from-top federal tax bracket, which is $173,206 in 2024. This will be indexed annually.
• Adjusting the calculation of taxable income to expand the limits on certain tax benefits.
• Limiting access to certain tax credits that could otherwise reduce the AMT payable.

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The bottom line is that strategies such as flow-through shares will still be beneficial for people in the top tax bracket, but between the higher AMT and higher capital gains taxes, the benefits will be less than they have been for many years. This is just one of the common strategies that will be watered down by the AMT and capital gains tax changes.

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