Watch: A Message from the CFO: Federal Budget Announcement Related to Capital Gain Taxation
Transcript
[00:00:25] Ray Punn:
On April 16th, 2024, the federal Government of Canada presented its most recent budget. Among the number of programs proposed was a change to the capital gains inclusion rate and taxation, which may have been an impact on Canadian investors. With the discussion around the recent announcement, I’ve asked Wayne Byrd, Skyline Group of Companies’ Chief Financial Officer, to join me on this quick web video today to discuss the impact a little bit further. Wayne, thanks for joining me today.
[00:00:54] Wayne Byrd:
Yeah. Thanks, Ray.
[00:00:55] Ray Punn:
So, let’s break this down a little bit further. Can you start by explaining what is the capital gain inclusion rate and what does that look like in terms of the recent change.
[00:01:05] Wayne Byrd:
Yeah, for sure. So before we talk about this being a recent change, it’s worth reminding all of our investors that, while it still is a proposed change, it requires vote, it requires royal assent, so it’s not yet a change and it’s not yet in effect. Is it likely to be? Probably. I like that we’re going to start and talk about just some of these terms that many of us just take for granted and that everybody understands what it is. And I would say the morning after watching this hit the news in a couple of fronts, I for sure was a little frustrated on how this was communicated through the media because they left out a few critical pieces. So I agree, let’s first start by clarifying what is inclusion rate and what does that mean? And I know that is a question for a number of investors, for a number of individuals here in Canada. So we’ll start by just trying to define inclusion rate. The capital gain inclusion rate means the amount that is included in your taxable income when doing your tax return for the relevant year. And this is personal, corporate, partnership, trust, joint, in lots of levels.
[00:02:26] Wayne Byrd:
So capital gain inclusion rate is the rate at which a realized capital gain is going to be included in your taxable income. So, to get this a little deeper, until this proposed change, 50% of your realized capital gain is the inclusion rate, currently. So it’s been 50% inclusion rate of realized capital gain has been added to your taxable income. What does that mean? If I realized a $100,000 capital gain in a year – last year – $50,000, 50% of that 100, was included in my taxable income. So, when we talk about this proposed change and how it affects investors, I think one of the pieces that was really missed, and missed the mark on communicating well, is the 50% inclusion rate still exists each year for any amount up to $250,000. The amount of capital gain realized beyond $250,000 is going to have a 66.67% inclusion rate. So really what they’ve done is they’re proposing a two-tiered system, much like our marginal tax rates as individuals, corporations, etc. So every year you can realize up to $250,000 capital gain and still only pay tax at 50% of that amount and the other 50% into your pocket. Beyond $250,000, incrementally, 66.67% is going to be taxed at whatever your rate is. So you’re still going to put 33.33% in your pocket tax-free.
[00:04:23] Ray Punn:
So Wayne, when the federal budget was announced just a couple of days ago, we’re recording now a few days later here, there’s been a lot of concerned Canadians, and also just even within our own Skyline investor base we’ve been receiving a lot of phone calls and questions that we’ve been tackling over the last couple of days. Can you further break this down on how it actually impacts investors?
[00:04:44] Wayne Byrd:
Yeah, absolutely. And in this point, I think numbers can speak volumes over us to try to explain it in words. So I’m going to go ahead and share the screen, and we’re going to run through a few examples here on the impact of the proposed change against the current regime. So I’m going to go ahead, I’m going to share the screen and walk through probably three examples here. Okay, so example one, what we’ve got here is, prior to June 25th, 2024 proposal, for its effective date, if there’s a $250,000 realized capital gain, the inclusion rate is 50%, so $125,000 of it is going to be included in taxable income. Right there. And let’s just assume everybody’s at the highest marginal tax rate. Let’s just take the worst case scenario. So $65,000 is going to be taxes payable on this realized capital gain of $250,000, in the regime that existed last year and up to the proposed date. You have $125,000 of tax-free income. You still get to keep, at that point, 50% of it in your pocket. So the net cash in your pocket is $185,000, that’s your $125,000 free, and then the net amount after tax. When this proposal takes effect, assuming it takes effect, if the realized capital gain is $250,000, without running through line by line, you’ll see that the net cash in pocket is the same. There is no effect on any amount up to $250,000 on a realized capital gain.
[00:06:39] Wayne Byrd:
And the important piece as well in this announcement is this is annual. This change, when it’s put into place, is effective June 25th, however, there still always is, unless somebody else changes things in a future federal budget, a floor, tier one of $250,000 remains at 50%. Moving forward a little bit let’s talk about doubling that amount. A $500,000 realized capital gain at a 50% inclusion rate. $250,000 of it is going to be taxed, $250,000 is tax-free income that’s in your pocket, that’s in your jeans. That’s maybe on a trip across the country, across the world. At the highest tax rate, 52%, $130,000 is payable. If this was done prior to this announcement, $370,000 was still the net benefit, the cash in your pocket. When this amendment goes forward, assuming it does, the difference really is this is netting you $348,000 and change in your pocket compared to $370,000. We still get our first $250,000 at a 50% inclusion rate, and then the difference at the higher rate. So, everybody can look and say, this is still pretty significant 20- $22,000 essentially at additional taxes payable, it’s still a pretty significant amount that is in your pocket. Go to the next level. $1 million realized capital gain. $1 million dollars, today that would be $740,000 in your pocket after tax of 260. Under the regime, under the proposed change, it would be $675,000 in your pocket after paying tax on the two-tiered system.
[00:08:45] Wayne Byrd:
It still is a pretty significant amount. Take this and do a number on it. 67.5% of that million dollars is in your pocket. It’s the step up on the amount exceeding $500 or, sorry, $250,000 realized capital gain that has that additional component. So, looking at the numbers for our investors, for everyday Canadians, it’s then assessing what does this mean for me and my investments? If somebody was in the position or space where the initial shock is, maybe I should go ahead and redeem to trigger tax. If they weren’t prior, if there wasn’t any prior consideration to, let’s use this example that’s on the screen $1 million of realized capital gain. If somebody is trying to lessen the taxes and kind of keep that $60-$65,000. Each year redeem $250 for four years. So redeem it out over four periods. Keep that realized capital gain below 250. There’s lots of other strategies that can be put into place here. I don’t want to run through the various scenarios. Obviously then, what should our investors do? Reach out to their Advisor, call Skyline Wealth, reach out to their Wealth Advisor and let the Advisor run through their specific scenario, understand what it is that the investor is concerned about, needs to do, and then formulate a plan.
[00:10:23] Ray Punn:
Those are some really good examples and some really good context. And I think it should bring some light for our investors and anyone else really watching this video. So if you have any further questions on the proposed changes and, and how it may impact your Skyline Investments, please don’t hesitate to reach out to your Skyline Wealth Advisor. You could also reach out to your accountant or your tax professional. You can email us directly at Invest@SkylineWealth.ca. Thank you for watching.
[00:10:52] Wayne Byrd:
Thanks everybody.