June 25 will be more popular than Midsummer!

Do you really want to be taxed at the highest rate? Nobody pops the champagne to celebrate their high tax rate. Selling little by little always pays off with or without the new measures. (Photo: 123RF)

GUEST EXPERT. Midsummer is just around the corner. A little beer, some chips, some Kain and a fire starter and we’re almost guaranteed a good time with friends and family.

This year will be a little different for certain professions. Accountants, notaries, financial advisors and financial planners are not looking forward to June 24. They are rather looking forward to June 25, 2024 for their clients’ requests to be finalized regarding the question of the time: do I have to move personally or corporately by June 25, 2024 due to changes to the rate of inclusion of capital gain?

The question has been the subject of much discussion since the last federal budget was tabled on April 16. Let’s recall the main points of the new measure, even if you already know them:

  • Business: modification of the inclusion rate for capital gains for corporations. It goes from 50% to 66.67%. The capital gains tax rate therefore increases from 25.09% to 33.45%, which represents an increase of 8.36%.
  • Particular: modification of the inclusion rate of capital gains greater than $250,000 realized annually by individuals. For an individual subject to the highest tax bracket, the capital gains tax rate therefore increases from 26.66% to 35.54%, which represents an increase of 8.88%.

Here are my blind spots and questions to ask yourself between now and June 25, 2024.

Business capital gains

If you are a shareholder, do you need cash for your personal projects?

If this is the case, you can sell your investments or real estate that have an unrealized gain, because you will be able to pay yourself a tax-free dividend from your business. For example, if your business purchased an investment at a cost of $150,000 and the investment is currently worth $250,000, you will generate a capital gain of $100,000, half of which, i.e. $50,000, will be available to you. be paid personally without tax repercussions. If you make the same transaction after June 25, 2024, you will be able to pay yourself $33,333 tax-free and your company will pay higher tax, approximately $33,450 instead of $25,090.

Do you have an operating company and management with a lot of money?

If so, your operating company could potentially be affected by the passive income rule. Generating a large capital gain can cause your operating corporation to lose its small business deduction.

Losing the small business deduction can represent an additional annual tax of $71,500. This is probably the most underestimated blind spot of the new measures. Discuss it with your professionals to find out if this tax rule affects your business.

You should know that from $50,000 in passive income (taxable capital gain, rent, dividend, royalties), you start to lose the DPE.

What are the shareholder’s intentions in relation to the assets?

If the shareholder wants to keep his building for the long term, why sell it solely to avoid higher taxes? Several experts stipulate that if you intend to keep your investments or your building for more than 7 to 11 years, it would be advantageous not to trigger the capital gain. The tax deferred over a long period always wins quite a bit against the short-term tax discount.

Never selling makes it easier to refinance buildings and avoid tax erosion. One of the “3 Ds” of taxation is to defer taxes, which is what you do if you avoid selling the company’s assets. In addition, if you do not realize your capital gain, you give yourself the right to believe in a potential return at an inclusion rate of 50%.

Can transferring real estate from one company to another company trigger a capital gain?

Yes. But do you have the cash flow to pay the taxes that come with it? You should check whether the building is subject to the welcome tax. Your tax specialist is then your best ally.

Personal capital gain

Do you want to sell all your buildings this year, how many buildings do you have?

Why rush the sale of your entire real estate portfolio? Do you really want to be taxed at the highest rate? Nobody pops the champagne to celebrate their high tax rate. Selling little by little always pays off with or without the new measures.

Do you own your buildings 100% or do you hold them with other people?

If you are partners with other people in a building, it may well be that if the building is sold, your capital gain will fall below the radar of $250,000. The rule is clear: you must not generate a capital gain greater than $250,000 per year per taxpayer.

Is selling before June 25, 2024 a must? Absolutely not if you have a per taxpayer gain of less than $250,000. Your tax rate will be the same if you sell before June 25, 2024 or if you wait. As a bonus, if you wait, you will likely generate even more RRSP room, which could potentially cancel out your tax bill.

Do you want to sell your investments from your management to repatriate them personally?

Why would you want to do that? Probably to take advantage of the lower inclusion rate on the first $250,000 of annual capital gains.

The issue is this: how are you going to transfer the investments held by your business to you? You will have to sell your investments and pay tax on your gain in your business. Subsequently, if you cannot pay yourself a tax-free dividend, the company will have no choice but to pay you a taxable dividend. I hope you don’t have plans to go to Cancun this year!

Good reflection! There are many possibilities, but there are several blind spots. Hoping that you will take the time to look in your rearview mirror, your mirrors and consult your co-pilot (tax specialist, accountant, financial planner) to make an informed decision.

And happy Midsummer!

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