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Increasing capital gains taxes, selling out?

Anthony Bollini-Nadeau

Update :
Update :
April 26, 2024

After several years of rumours, the federal government has finally announced an increase in the capital gains inclusion rate from 50% to 66% and 2/3% for gains over $250,000 by an individual in the same year, on all types of investments.

For gains realized in a corporation, the rate rises directly to 66 and 2/3% from the first dollar. This measure will directly affect doctors and other professionals whose activities, and investments, are carried out through a company.

These new rules will come into force on June 25, 2024 if the bill is approved.

As the legislative texts have not yet been produced, many elements remain to be confirmed. We therefore reserve the right to comment.

Here are our preliminary thoughts.

Should you sell all your assets to save taxes? Einstein gives the answer...

If you currently have a significant capital gain on investments, it may be tempting to liquidate everything before June 25. Is this the right decision?

A calculation is in order.

First, if you realize less than $250,000 in gains during the year - the sale of your second home, a plex or securities in an investment portfolio, for example - nothing changes for you.

If your gains exceed $250,000 for the year, here's what you need to consider. Assuming an expected rate of return of 7% on the shares and an allocation of 2/3 of this return to capital gains and 1/3 to dividends, based on historical 1, the capital appreciation rate of interest is 2/3 * 7% = 4.69%.

If you realize the gain today, you'll save tax, but you'll pay that tax today rather than some distant future. The result? Less money on which compound returns can accumulate. Here's a hypothetical demonstration in the table below.

For a gain exceeding $250,000 in the year Sell Postpone
Fair market value 200 000 $ 200 000 $
Adjusted cost base 100 000 $ 100 000 $
Capital gain realized 100 000 $
Taxable capital gain (50%) 50 000 $
Personal tax (26 655) $
Amount reinvested 173 345 $
10 years later...
Fair market value 274 134 $ 316 287 $
Adjusted cost base 173 345 $ 100 000 $
Capital gain realized 100 789 $ 216 287 $
Taxable capital gain (66.67%) 67 196 $ 144 199 $
Personal tax (35 822) $ (76 872) $
Net amount 238 312 $ 239 415 $
20 years later...
Net amount 341 053 $ 357 955 $
30 years later...
Net amount 503 532 $ 545 417 $

Albert Einstein called compound interest the 8th wonder of the world, and rightly so. Despite a higher tax bill, the compounding effect is powerful enough that after 10 years you'll be better off. The effect is even more powerful 20 or 30 years later.

So the preliminary answer is: if you were thinking of selling your investment in the next 10 years and realizing more than $250,000 in capital gains in the same year, it might be worth crystallizing the gain before June 25. Otherwise, it's probably better to take no action at all and let the compound return work its magic.

Remember, if you're 40, your investment/retirement horizon is about 50 years. Even the average retiree still has an investment horizon of several decades. If you have a good investment - a diversified ETF, for example - there's no reason to liquidate it in the next 10 years.

Investments in a company

The previous scenario dealt with investments held by an individual. What about investments held through a corporation? Unfortunately, these do not benefit from the first $250,000 exemption. They are therefore taxed from the first dollar realized.

The calculation is also more complex, since it must take into account the taxation of both the company and the shareholder. Since each case is unique and depends on the financial situation of the company and its shareholder, your advisor will have to do this analysis for you.

Your Archer index-linked investments, even more effective!

As discussed above, the long-term growth effect is more advantageous than the taxes you could save by selling your assets today. The key is to have a low turnover rate in your portfolio and to realize gains very rarely.

Good news: your Archer investments are made up of these types of low-rollover investments thanks to passive index management! The latter triggers very little capital gain, which favours the long-term effect of compound return and tax deferral to achieve the result shown in the analysis above.

Financial planning: at the heart of your investment strategy

Every investor's personal, financial and tax situation is unique. Only a certified financial planner, supported by a team of experienced portfolio managers, can ensure that your investment strategy is optimal and takes into account the tax treatment of different forms of income. Talk to your advisor!

[1] S&P 500 Dividend Aristocrats: The Importance of Stable Dividend Income. S&P Global, September 19, 2023