The recent changes to capital gains that were first announced in the 2024 Canadian Federal Budget have been official for a couple months now.

These changes have made selling anything for a “capital gain” a lot more expensive now, but life insurance can help.

What is the Capital Gains inclusion rate

Just so we’re all on the same page, the Canadian government defines a capital gain as “when you sell, or are considered to have sold, a capital property for more than the total of its adjusted cost base and the outlays and expenses incurred to sell the property.”

Basically, you bought something for price A and then sold it for a higher price B. Whatever that increase is, it is called a capital gain.

The part that has changed is how much of this gain is taxed. It used to be that 50% of your gain was taxed. Now with the new capital gains inclusion, 66% is included to be taxed. The inclusion.

Personally, any gains below $250,000 are taxed at the old inclusion rate of 50% and then anything above $250,000, 66% of that is taxed at whatever your marginal tax rate is.

If you’re investing in a corporation, the whole amount is at the 66% inclusion, there is no lower number. The government says you’re a bad person for making money and all the problems are your fault. So, they are going to take more of your money and spend it better than you can.

How have we been sold this change?

The government sold this change by saying that this new, higher capital gains inclusion  only affects about 0.13% of people each year.

Is this true? Sort of, but only if you exactly fit the scenario they used to sell the tax increase. If anything changes or you zoom out, it’s false.

What they’re selling you is that this only affects 0.13% of Canadians or 44,000 people which is sort of true.

Most Canadians who would have this large capital gain will only have it once or maybe twice in their lifetime – probably on death or after selling vacation property. Most people wouldn’t have this large capital gain every year unless they were very rich or a genius investor.

So yes, it will affect 44,000 Canadians this year, but it will affect a different 44,000 Canadians next year and a different 44,000 people the following year as each of these cohorts has a windfall that the government wants a bigger piece of.

Right now, the baby boomer generation are mostly retired and some of them are starting to pass away – this could be your parents.

When they pass away, their estate will have to file their terminal tax return which is probably the largest one they will ever file in their lives. This includes the value of their house, the full value of all their RRSPs, their business and any other investments…. this quickly adds up to a lot of people … a lot more than the 0.13% of people the government is trying to convince you it affects.

Your inheritance that your parents thought they were giving to you – well now more of that is going to Ottawa because your parents were bad, greedy, rich people who should pay a little more, according to the government.

What role does life insurance play in mitigating the new capital gains inclusion rate?

If you want to make sure your legacy or your parent’s legacy goes to the next generation, you or your kids. You can buy life insurance now with the goal of the death benefit paying the terminal taxes on the assets, the business, the property so that all of these can transfer to the next generation.

If there’s no liquidity in the estate or if the children don’t have money at the time of death, some of the assets may have to be sold to pay the taxes. Sounds simple, but what if the market is down when you are forced to sell, what if it’s real estate and the market is soft and it would be better to keep the property than have to try and sell now?

The average person is going to need to think about how much coverage they have.

If your parents owned an apartment building for a 10s of thousands or hundreds of thousands in the 80s or 90s, that could be worth millions now and you are going to be slapped with a big capital gains bill when that transfers.  If they owned a business and it’s passed down to you, there’s tax payable on that.

This is something that you will need a lot of coverage for, you need to work with someone who can help you figure out how much you or your children will need in the future.

This is where working with a professional can come in. You’ll need some insurance, so you need a good advisor (that’s us at Safe Pacific).  You’ll also need a good accounting team and if you want to make a plan, you’ll need a good estate lawyer to write everything up.

On the insurance front, we’re estimating a future tax liability while not knowing some important facts like how many years until the legacy transfer happens, what are taxes going to be like at that time and what the value of the asset is going to be at that time?

We can get close, and an estimate is better than nothing. Say your insurance paid out to your child for $600,000 but the building ended up taxed at $660,000. With the insurance estimate, you’re only short the $60,000 which is a lot easier to come up with than $660,000.

If you own a business, real estate, a cottage / vacation property and want your kids to be able to cover the tax price tag without selling it, then come and talk to us.

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