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The capital gains inclusion rate has gone up for corporations…now what?!



The capital gains inclusion rate has gone up for corporations…now what?!


Brendan Greenwood, CFP, CIM, B.Comm | April 29, 2024


One of the most talked about things in the new 2024 federal budget was the increase in the capital gains inclusion rate. Business owners are most impacted.  At present, one half of realized capital gains inside a corporation are included in taxable income.  After June 25, 2024, 2/3’s of all capital gains realized inside corporations will be included in taxable income.  Pending the upcoming change, it may be worth it to consider realizing certain capital gains now.


In light, of this recent federal budget change all business owners should consider planning options available to them when accumulating wealth inside a corporation.  The new higher capital gains inclusion rate not only means a higher tax rate on realized capital gains in the corporation, but those realized gains will increase your aggregate investment income more quickly due to the higher inclusion rate.  For every $1 in aggregate investment income over the $50,000 threshold, $5 of active business income will no longer qualify for the small business deduction.  At $150,000 in aggregate investment income (capital gains, dividends and interest) none of your active business income will qualify for the small business deduction.  The small business deduction combined tax rate in Ontario is 12.2%.  As long as annual aggregate investment income is kept below $50,000, the first $500,000 in active business income benefits from this lower tax rate.  As aggregate investment income rises, active business income begins to be subjected to the combined general corporate tax rate which in Ontario is 26.5%.  See example below:





What can you do to reduce your tax liability and keep more of your hard-earned money?  A balanced approach is usually best.  The following, are planning options available to you that can help: 


  • Registered Retirement Savings Plan (RRSP) - Funding an RRSP can reduce your annual corporate and personal tax liability, creating a tax-sheltered environment to grow savings through investment and provide future retirement income planning opportunities.


  • Individual Pension Plan (IPP) – Funding an IPP can provide you with greater tax deductions for your business and a larger pool of money to grow tax deferred.  Funding limits are substantially higher than for RRSPs.  IPPs can be structured to provide retirement benefits tailored to the business owners needs and goals.


  • Whole Life Insurance –  Funding a Whole Life Insurance Policy inside your corporation can be an efficient use of corporate dollars.  These policies provide tax-deferred growth of the cash value which can be accessed tax-efficiently during retirement.  In addition, the tax-free death benefit also makes owning a whole life insurance policy within a corporation one of the most efficient ways to create generational wealth.


  • Tax Efficient Investments – Holding investments that either defer tax or pay eligible dividend income can be an effective additional measure to reduce your annual tax liability.


Your personal situation and objectives will best determine how to allocation corporate savings most effectively.  An advisor can help implement the strategies that make the most sense for you.




Brendan Greenwood is an Investment Advisor and Financial Planner with Worldsource Securities Inc. focused on improving the lives of his clients and their families through holistic planning. He specializes in tax advantaged personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionals, business owners, retirees and their families.


For other articles written by Brendan Greenwood visit his Blog | GreenwoodWealth


Book a discovery meeting with Brendan here: https://calendly.com/greenwoodwealth to see if we can help.





*Insurance solutions and related services are mentioned in this newsletter as part of comprehensive financial planning services only and are not available through Worldsource Securities Inc. Investments products and services are provided by Brendan Greenwood through Worldsource Securities Inc., sponsoring investment dealer and a Member of the Canadian Investor Protection Fund (CIPF) and of the Canadian Investment Regulatory Organization (CIRO).


Investing involves risk. Equity markets are volatile and will increase and decrease in response to economic, political, regulatory and other developments. The risks and potential rewards are usually greater for small companies and companies located in emerging markets. Bond markets and fixed-income securities are sensitive to interest rate movements. Inflation, credit and default risks are all associated with fixed income securities. Diversification may not protect against market risk and loss of principal may result. Commissions, trailing commissions, management fees and expenses all may be associated with investing in exchange-traded funds (ETFs). Please read the relevant prospectus before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.


This material has been prepared for informational purposes only and should not be considered personal investment advice or solicitation to buy or sell any securities. As well, it is not intended to provide, and should not be relied on for, tax, legal or accounting advice. It may include information concerning financial markets as at particular point in time and is subject to change without notice. Every effort has been made to compile it from reliable sources, however, no warranty can be made as to its accuracy or completeness. Investors should seek appropriate professional advice before acting on any of the information here. The views expressed here are those of the authors and writers only and not necessarily those of Worldsource Securities Inc., its employees or affiliates. There may also be projections or other "forward-looking statements." There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Before acting on any of the information provided, please contact your advisor for individual financial advice based on your personal circumstances.

 


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