As a high-net-worth individual in Canada, you likely have a carefully curated, long-term investment strategy designed to grow wealth. With the introduction of the 2024 Federal Budget this past April, it’s a crucial time to reevaluate these financial strategies.
This reassessment is essential to confirm that your existing strategies remain advantageous and adaptive to the newly announced fiscal changes. Ensuring that your investment plans are aligned with the current economic environment will help you continue to make informed, strategic decisions that safeguard and grow your wealth effectively.
The federal government’s latest financial blueprint has numerous implications, specifically for individuals with higher incomes in Canada. In this article, we’ll examine the most significant changes introduced in the budget and explore how these could impact high-income earners and their investment decisions.
The 2024 Federal Budget
The 2024 Federal Budget, presented on April 16, 2024, introduces measures to address housing affordability and the cost of living while detailing fiscal strategies for managing these enhancements.
Titled “Fairness for Every Generation,” this year’s federal budget introduces several tax measures that primarily affect wealthier Canadians. According to the government, these changes aim to enhance the fairness of Canada’s tax system.
A critical aspect of the budget that high-net-worth individuals must pay attention to is the modification of the capital gains inclusion rate. This change signifies a shift in tax policy that could substantially affect investment strategies for higher-earning Canadians.
Fundamental Change: Increased Capital Gains Inclusion Rate
Let’s explore one of the most critical changes in the 2024 budget in more detail: the increase in the capital gains inclusion rate.
Now, two-thirds (66.67%) of capital gains will be considered taxable income, up from half (50%) previously. This adjustment will impact corporations, trusts, and high-income individuals once their capital gains exceed $250,000 annually.
This new rate applies to all capital gains for corporations, potentially leading to significant tax implications.
Schedule your free consultation with Selkirk Wealth Management to learn how to navigate the new capital gains inclusion rate effectively.
How Does This Impact Your Investments?
Higher Taxes on Investment Sales
For investors with substantial portfolios, often exceeding $1 million, the raised inclusion rate translates directly into more significant taxes on the sale of investments such as stocks, bonds, and mutual funds.
If you have these assets, this change could result in a considerable increase in your tax burden when they are sold. Overall, the new capital gains inclusion rate could negatively impact your returns on investment.
Potential for Increased Portfolio Turnover
Another result of this new tax structure is that investors may be compelled to reconsider their asset sale strategies. Thanks to this newly introduced rate, your current strategy may be less beneficial.
Holding onto investments longer to defer capital gains tax could become a more attractive strategy; however, you would also risk the potential growth opportunities through well-positioned trades.
How Does This Impact Home Sales?
Limited Impact on Primary Residence
Your primary residence remains exempt from the capital gains tax, providing some relief for individuals concerned about a crucial property investment.
Increased Tax on Secondary Properties
However, the higher capital gains inclusion rate will affect secondary properties such as vacation homes or rental properties. High-net-worth individuals owning multiple properties might see a substantial increase in the tax owed when selling these properties.
Other Changes from the 2024 Federal Budget
Lifetime Capital Gains Exemption (LCGE) Increase
The budget proposes an increase in the LCGE to $1.25 million, specifically for the sale of qualified small business corporation shares. Although this provides some tax relief, its impact may be limited for those with extensive investment portfolios.
The Canadian Entrepreneur’s Incentive
Additionally, the budget introduces the Canadian Entrepreneur’s Incentive, an initiative that extends the capital gains exemption with a more targeted application. This measure offers a reduced tax rate on profits from selling specific types of shares.
This incentive encourages investment in new businesses and specific industries. The government aims to foster economic diversification and stimulate innovation among Canada’s small and medium-sized enterprises.
What Can Investors Do to Improve Their Investment Strategies?
Investors should consider various approaches to mitigate the impacts of increased capital gains taxes. Some strategies include revisiting investment allocations, considering alternative investments, or potentially increasing contributions to tax-sheltered accounts.
To give you a better idea of your options, we’ll take a deeper look at effective strategies designed to minimize the tax impact, optimizing investment growth and preserving your wealth:
1. Utilize Tax-Deferred and Tax-Free Accounts
Investing through tax-sheltered accounts such as Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) can be a strategic move. These accounts allow capital gains to grow tax-free or tax-deferred, mitigating the impact of the increased capital gains inclusion rate.
- RRSPs: Contributions to RRSPs are tax-deductible, and any return on investment you earn within these accounts is tax-deferred until withdrawal.
- TFSAs: Contributions to TFSAs are made with after-tax dollars, but all gains and withdrawals are tax-free. Maximizing contributions to TFSAs can provide high-net-worth individuals with a flexible and tax-efficient way to earn investment income and capital gains without further tax liability.
2. Strategic Timing of Asset Sales
To manage the tax implications of the increased capital gains inclusion rate, investors might consider a more strategic approach to the timing of selling their assets.
For instance, you can implement a tax-loss harvesting strategy. This would offset realized capital gains with realized capital losses, reducing taxable capital gains overall.
Another option is holding investments longer to benefit from preferential tax treatment on long-term capital gains. If applicable, you’ll be able to defer taxes.
3. Explore Estate and Gift Planning
Estate planning and gifting strategies can also play a crucial role in managing investments and tax liabilities effectively under the new budget changes.
Consider gifting investments or cash to family members in lower tax brackets. While direct financial gifts aren’t taxable to the recipient in Canada, transferring assets can trigger capital gains. However, if strategically planned, this could spread and potentially reduce the overall tax burden.
You could also set up a family trust. These can be beneficial for estate planning and tax management, allowing for income splitting among beneficiaries who may be taxed at lower rates.
4. Leverage Professional Financial Advice
Given the complexity of investment decisions and tax planning, consulting with financial advisors, tax professionals, and estate planners is the best choice.
Our knowledgeable advisors at Selkirk Wealth Management have experience helping higher-income investors lower their taxes. We offer personalized advice tailored to individual financial situations and help high-net-worth individuals navigate the nuances of tax optimization strategies.
Reassess Your Strategies Now
The 2024 Federal Budget introduces significant changes that will impact high-net-worth individuals in Canada. With increased capital gains taxes and other financial adjustments, it’s more important than ever for investors to review their portfolios and seek professional advice to navigate this new fiscal landscape effectively.
For personalized advice and tailored investment strategies that align with the latest tax regulations, consult a financial advisor from Selkirk Wealth Management at Wellington-Altus Private Wealth. Our experts are equipped to help you optimize your financial portfolio in response to the 2024 Federal Budget changes. Contact us today to ensure you’re able to continue meeting your financial objectives in an evolving economic environment.
