Tag Archives: capital gains tax

Podcast & Transcript: Tax lawyer Anna Malazhavaya on CRA’s expanded powers and moving to the U.S.

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Anna Malazhavaya/AdvotaxLaw.ca

The following is an edited transcript of an interview conducted by financial advisor Darren Coleman of the Two Way Traffic podcast with tax lawyer Anna Malazhavaya of Advotax Law.

It appeared on September 6th under the title ‘What you need to know about recent tax changes in Canada.’ Advotax is a team of lawyers and tax professionals that serves individuals, businesses and real property owners with tax planning and tax-dispute resolutions involving the Canada Revenue Agency. The discussion explored everything from the capital gains inclusion rate to expanded powers of the CRA to clients asking about moving to the US.

“It’s emotional but for some the increase in the capital gains inclusion rate was the last straw as they choose to leave Canada,” said Anna who added that over four million Canadians hold more than one property which means the government’s claim that this affects only 0.13% of the population isn’t true. “People are calling me every week. The wealthiest, the most talented entrepreneurs, are leaving Canada. It’s very sad to see.”

Anna and Darren talked about this phenomenon and how the June 25th deadline made it more expensive to leave the country with what can be a hefty departure tax. They also got into RRSPs, RIFs, and bare trusts which involve putting your property in someone else’s name. Anna said while the bare trust may have been designed to catch those who are less than scrupulous, it also captures honest people and gave examples.

Here’s a link to the podcast.

https://twowaytraffic.transistor.fm/episodes/what-you-need-to-know-about-recent-canadian-tax-changes

Darren Coleman

I want your perspective and what your clients are thinking about the capital gains change we saw recently, and the deadline for people making changes. Now we’re in the new environment where the inclusion rate, or the amount of money you have to pay tax on, has gone up. And the government told us this was only going to affect 0.13% of taxpayers. Do you think their math was right?

Anna Malazhavaya

I have doubts. I’m not an economist and don’t have access to all the government stats, but I can share some stats. Capital gain may apply on the sale of your property that is not your principal residence. This includes your cottage, and your investment in rental properties.

4 million Canadians hold more than one property

Darren Coleman

More than four million Canadians hold more than one property. So four million Canadians, potentially, may be subject to that new increase capital gain rate. So that’s not 0.13%. That’s more.

Anna Malazhavaya

It’s way more. Of course, if I argued for the other side, I would say, Well, you don’t know how much money these people made on the property, and the first $250,000 of capital gain is still subject to the old rate, and that’s true. But at the same time, something tells me if these people held the property for more than 10 years that gain will be substantial. Look at how the real estate market performed in the last 20 years.

Darren Coleman

A lot of these people will be subject to the new rules. And not only that, think about people who only have one property, and let’s say, live on a farm property, and they have their house. When they sell their property, not the entire sale price will be sheltered by the principal residence exemption, but only the portion that’s required for the maintenance of their farm property. Everything in excess will be subject to capital gain and can potentially be subject to these new higher rates. Do you know how the government arrived at their number? A reasonable solution would have been to look at past taxpayer data and say, if we look at the last five or 10 years, how many taxpayers had a capital gain over $250,000? Let’s average it out over a bunch of years. But that’s not what they did. They looked at one year, 2022, and said only 0.13% of taxpayers had a capital gain of over $250,000. But that was also a negative year for stock markets globally, and a bit of a negative year for real estate equity markets everywhere. Tell me a little more about how your clients are experiencing this change.

Anna Malazhavaya

Until 2022 I probably had five people consulting me about leaving Canada. Normally, it was the other way around. We had all those talented people who wanted to bring their money, settle their life in Canada, educate their children here, build their future, build businesses, hire people. Pay taxes at 54% mind you. But this year alone, I have over a dozen new clients who plan to leave Canada and for my practice it’s a big change. People calling me practically every week, saying, I’m done. You know what? This capital gain game change. It did not affect me today. It probably won’t affect me tomorrow, but it’s the straw that broke the camel’s back.

More Canadians want to leave the country

Darren Coleman

The people who used to hire people, who used to come up with brilliant solutions, making everyone’s life better, they’re leaving Canada. Very sad to see and you’re not alone in experiencing that. I had a conversation this morning with a cross-border tax accountant and he said he’s had a surge of people looking to leave Canada, and he blames it on the tax policies which are making it less attractive for them to be here. Is it easy to just pack up and go to places like Florida?

Anna Malazhavaya

Leaving Canada became a lot more expensive. If you want to leave Canada, you are treated by Canadian law as if you sold all of your assets, even though you’re not selling anything. You keep all your assets. But the government says, Okay, fine, you want to leave Canada, but we want all the tax on the gain that you accrued to date.  Some call it a departure tax, although this isn’t an official name, but it can hit you hard if you decide to leave Canada. So you have to declare all the gain you had from all your assets. Continue Reading…

2023 Federal Budget: Deficit swells; AMT rises for wealthy but no jump in Capital Gains tax for middle class

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The 2023 federal budget dropped on or about 4 pm Tuesday (March 28.) You can click here and here for budget documents and the latest from the Department of Finance. Below are links to some of the early media coverage, much of which is in Wednesday’s papers.

The theme of the budget is Making Life More Affordable, a somewhat comic choice given that government’s inflationary policies and high-spending, high-taxing behaviour is a big part of what makes life so expensive, especially for one-income couples. [See Steve Nease cartoon below on his take on the impact on the middle class.]

Here’s the Department of Finance’s backgrounder on it.

Pre-budget one of the biggest concerns expressed by investors was whether the capital gains tax or the inclusion rate might be hiked. That did not appear to transpire in the budget, at least for the middle class. See however Christopher Nardi’s article in the National Post highlighted below: he suggests those affected by the Alternative Minimum Tax (AMT) may indeed pay more in capital gains tax.

And here’s CIBC Wealth’s tax guru Jamie Golombek, writing on both topics in the Financial Post: Alternative minimum tax changes will make it harder for high-income earners to avoid paying taxes.

Also hoped for was measures to delay or reduce annual forced taxable withdrawals from Registered Retirement Income Funds (RRIFs). I saw no mention of this in early coverage listed below.

CBC’s summary

On TV, the CBC highlighted that the deficit will grow by $69 billion between 2022 and 2028, no longer projecting a balanced budget in this fiscal framework. On the CBC website it provided the following highlights:

  • $43B in net new spending over six years.
  • 3 main priorities: health care/dental, affordability and clean economy.
  • Doubling of GST rebate extended for lower income Canadians, up to $467 for a family.
  • $13B over five years to implement dental care plan for families earning less than $90K.
  • $20B over six years for tax credits to promote investment in green technologies.
  • $4B over five years for an Indigenous housing strategy.
  • $359 million over five years for programs addressing the opioid crisis.
  • $158 million over three years for a suicide prevention hotline, launching Nov. 30.
  • Creation of new agency to combat foreign interference.
  • Deficit for 2022-23 expected to be $43B, higher than projected in the fall.
  • Higher than expected deficits projected for next 5 years.
  • Federal debt hits $1.18 trillion. Debt-to-GDP ratio will rise slightly over next 2 years.
Cartoon by Steve Nease

CTV’s summary

Here are the highlights in CTV’s view:

Budget 2023 prioritizes pocketbook help and clean economy, deficit projected at $40.1B.

  •  $2.5 billion for a GST tax credit billed as a ‘grocery rebate’
  •  $46.2 billion for federal-provincial-territorial health deals
  •  $13 billion for expanding the federal dental plan
  •  2 per cent cap on incoming excise duty increase on alcohol
  •  Advancing passenger protections but upping a traveller charge
  •  $4.5 billion for 30 per cent tax credit on clean tech manufacturing
  •  $15.4 billion in savings from public service spending cutbacks

Much of the budget was previously announced or telegraphed

The National Post weighed in with this: Chrystia Freeland abandons budget balance plan, adding $50 billion in debt. It noted “much of what is in the budget has been previously announced — or at the very least telegraphed. Ottawa will spend an extra $22 billion on health care over the next five years, as per provincial deals announced last month. It’s also adding about $7 billion for expanded dental care. Low-income Canadians will receive an extra GST credit, at a cost of $2.5 billion.

A Joe Biden Budget

Also at the Post, William Watson said Freeland delivers a Joe Biden budget.  

“From blue-collar bluster to giant green subsidies, Made-in-Canada packaging and make-the-rich-pay rhetoric, Canada’s federal budget borrows from the U.S.”

Green tax credits, more dental care as expected pre-budget

Also expected, according to this FP story published before the budget was released, was “significant” tax credits for the green economy, more measures on dental care and other ways to make life more “affordable,” including amendments to the Criminal Code to reduce predatory lending. It was expected the criminal interest rate be lowered to 35%, as it is in Quebec. The predatory lending measure is indeed included, as you can see in the link to the backgrounder above.

Also leaked earlier in the day was a report in the Globe & Mail that there will be a clean-tech manufacturing tax credit to encourage domestic mining of critical minerals.

Alternative Minimum Tax (AMT) rises

Here is an early overview from the Globe & Mail after 4 pm: Federal budget 2023: Trudeau government bets on green economy, expands dental care.  The G&M reported Ottawa plans to raise “nearly $3-billion through changes to the Alternative Minimum Tax, which is a second way of calculating tax obligations to ensure a high wealth individual can’t make excessive use of tax deductions … 99 per cent of the AMT would be paid by those who earn more than $300,000 a year and about 80 per cent would be paid by those who earn more than $1-million.”

Christopher Nardi in the National Post wrote the following summary, with the subheading “Bye bye federal budget surplus, hello light recession.”

Note this sentence from Nardi:

‘With this first overhaul since 1986, the AMT will now apply largely to Canadians in the top income tax bracket (over $173,000) and will see their capital gains inclusion rate jump to 100 per cent and a host of eligible tax deductions, like moving or employment expenses, dropped to 50 per cent.”

Continue Reading…

Tax Strategies to Boost your Financial Savings

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Lowrie Financial/Unsplash

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Today’s Simple Investing Take-Away: Your tax planning strategy should take a holistic, tax-efficient investing stance in both tax-sheltered and taxable investment vehicles to optimize saving for the future.

Does it bug you to pay more taxes than you need to? I don’t think I’ve ever met anyone eager to shell out extra money, just in case the government could use more. But practically speaking, that’s exactly what you end up doing if you don’t build tax-efficient investing and other tailored tax strategies into your ongoing financial planning.

Are you:

  • A young professional, aggressively saving for a distant future?
  • A seasoned business owner, managing substantial financial savings
  • Starting to spend down your assets in retirement?
  • Planning for how to pass your wealth on to your heirs?

Regardless, there are many best practices for maximizing your after-tax returns—i.e., the ones you get to keep. Today, let’s cover what some of those sensible tax strategies look like.

Fill up your Tax-Sheltered Accounts

The government offers a number of “registered” investment accounts to provide various types of tax-efficient investing incentives. They want you to save for retirement and other life goals, so why not take them up on the offer? Two of the big ones are the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA).

Saving for Retirement with Your RRSP

As the name suggests, your RRSP is meant to provide tax-efficient investing for retirement. In the years you contribute to your RRSP, you receive a deduction on your tax return in equal measure. Then the proceeds grow tax-free. Once you withdraw RRSP assets in retirement, you pay income tax on them.

In theory, your tax rate is often lower once you retire, so you should ultimately pay fewer taxes on taxable income. Even if there are some retirement years when your tax rates are higher, you’ve still benefited from years of tax-free capital growth in an RRSP. And you still have more flexibility to plan your RRSP withdrawals to synchronize with the rest of your tax planning.

Bonus tips: If you’re a couple, you may also consider using a spousal RRSP to minimize your household’s overall tax burden. This works especially well if one of you generates a lot more income than the other. There also are specialized guidelines to be aware of if you’re a business owner considering how to most tax-efficiently draw a salary and participate in the Canada Pension Plan (CPP).

Saving for the Future with Your TFSA

TFSAs are meant to be used for tax-efficient investing toward any mid- to long-term financial goals. So, at any age, most taxpayers are well-advised to fill up their TFSA space to the extent permitted. You fund your TFSA with after-tax dollars, which means there’s no immediate “reward” or deduction on your tax return in the year you make a contribution. But after that, the assets grow tax-free while they’re in your TFSA, and you pay no additional taxes when you withdraw them, which you can do at any time.

Bonus tip: Too often, people leave their TFSA accounts sitting in cash, using it like an ATM machine. Unfortunately, this defeats the purpose, since you lose out on the tax-free gains you could expect to earn by investing that cash in the market. How much is tax-efficient investing worth? In “Cash is not king: A better investment strategy for your TFSA,” I offer some specific illustrations.

Manage your personal Tax Planning like a Boss

Once you’ve filled your tax-sheltered accounts, you can invest any additional assets in your taxable accounts.

Like hard-working “employees,” these assets can thrive or dive depending on their management. Think of it this way: As a business owner, you wouldn’t hire a promising team of talented individuals, only to assign them random roles and responsibilities. Likewise, your various investments and investment accounts have unique qualities worth tending to within your overall tax-efficient investing. Let’s cover a few of them here.

Capital Gains Reign

In your taxable accounts, your best source of tax-efficient investing income comes in the form of capital gains or even better, deferred/unrealized capital gains. This is super important, but often forgotten in the pursuit of sexier trading tactics, like chasing hot stocks or big dividends. (It’s popular to think of dividends as a great source of dependable income in retirement, but in “Building your financial stop list: Stop chasing dividends,” I explained why that’s mostly a myth.)

Don’t believe me? Consider these 2021 combined tax rates for Ontario on various sources of investment income:

Taxable Income Source

2021 Combined Tax Rate

Interest and other income

53.53%

Eligible dividends (mostly Cdn. companies)

39.34%

Capital gains

26.76%

Source: CI Global Asset Management
This illustration assumes a top marginal tax rate in Ontario, or taxable income greater than $220,000. But the point remains the same at other rates: You can usually lower your taxes by favouring capital gains over other sources of taxable income.

Also remember, you don’t pay taxes on a capital gain until you actually “realize” it, by selling an investment for more than you paid for it. Combine this point with the rates just presented, and your ideal investment strategy seems obvious: Tax-efficient investing translates to a low-cost, low turn-over, buy-and-hold approach.

Since minimizing the impact of taxes is a huge way to improve on your overall rate of returns, this happens to be exactly what I advise for any of your investments, whether you’re holding them in a taxable or tax-sheltered account.

Bonus tip: Once you’ve embraced low-cost, low-trade investing, be sure to also use funds from fund managers who are doing the same. It defeats the purpose if you are being disciplined about your tax-efficient investing, but the underlying funds in which you’re invested are not.

Asset Location Is where it’s at

As your wealth accumulates, you’re likely to end up with a mixture of registered and taxable accounts. You can reduce your overall tax burden by managing these accounts as a single, tax-efficient portfolio, instead of treating each as an investment “island.” Asset location means locating each kind of investment, or asset, in the right type of account, given its tax efficiency:

  1. Hold your relatively tax-inefficient assets in tax-favoured accounts, where the inefficiencies don’t matter as much. Examples include bonds, which generate interest and other non-capital-gain income; and investments that have higher than average yields such as REITs.
  2. Hold your relatively tax-efficient assets in taxable accounts; examples include broad domestic or global stock funds that generate most of their returns as capital gains.

An Easy Rebalancing Strategy

As I covered in “Rebalancing in Down Markets, Scary But Important,” it’s essential to periodically rebalance your investment portfolio. It’s like tending to your garden by thinning out (selling) some of the overgrowth, and planting (buying) where you need more. This keeps your productive portfolio growing as hoped for, with a buy low, sell high strategy.

But as usual, there’s a catch: When you “sell high” in a taxable account, you’ll realize taxable gains. So, whenever possible, try using cash you’d be investing anyway to do your rebalancing for you. Instead of just plopping any new investable cash into haphazard holdings, invest it wherever your portfolio is underweight relative to your goals. In so doing, you can improve on your tax-efficient investing. (PS: Here’s another post I’ve published, with additional ideas on “What to Do with Excess Cash.”)

Tax-Loss Harvesting

Again, one of the best ways for your assets to grow tax-efficiently is within your registered, tax-sheltered accounts. That said, tax-loss harvesting is one tax-efficient investing strategy you can only do in a taxable account. Without diving too deep, when one or more of your holdings is worth less than you paid for it — but over the long run you expect the position to grow — you can use tax-loss harvesting to:

  1. Sell the depreciated position to generate a capital loss, which you can then use to offset current or future taxable gains.
  2. Promptly buy a similar (but not identical!) position so you remain invested in the market as planned.
  3. Eventually (optionally), reinvest in the original position to restore your portfolio to its original mix.

Again, all this only works within a taxable account. Also, the CRA has strict rules on what qualifies as a true capital loss, and may disallow it if you violate those rules. This makes it one smart strategy best completed in alliance with your personal financial advisor.

Advanced Tax Strategies for Families and Business Owners

We’ve barely scratched the surface on the myriad tax-planning strategies you can deploy in your quest to pay no more than their fair share of income taxes. Depending on your particular circumstances, you can take advantage of some of these tax strategies: Continue Reading…

Tax rates likely to rise: what to do about it

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By Eva Khabas

Special to the Financial Independence Hub 

The Covid pandemic has led to unprecedented government spending with a deficit that has reached record heights.

Sooner or later someone has to pay for this and that usually means the taxpayer. Don’t look now but when you start your tax planning it’s probably best to assume that tax rates are going up in Canada.

However, even before Covid the federal government was talking about increasing the capital gains tax.

Capital gains inclusion rate could go back up to 75%

Currently, only 50% of capital gains are, in fact, taxable but this was not always the case. In fact, from 1990 to 1999 75% of capital gains were subject to tax! It’s logical to assume that tax revenues will be increased through a higher capital gains portion that is taxable, since capital gains are perceived as ‘passive’ income from investments. In theory, this means taxes should be generated by wealthier taxpayers.

Loss of Principal Residence exemption?

Also, the big fear of every Canadian is that government will remove the principal-residency exemption. Currently, taxpayers can sell their primary residence at a gain and not pay any taxes.  Many taxpayers rely on the appreciation in value of their homes as their main source of retirement income. The impact of making gains on principal residency taxable would be devastating to many, if not most, Canadians.

Before discussing what to do about all this, let’s make sure we understand what capital gains are, how they are different from your other income, and when these gains become taxable.

So, what exactly is capital gain? In a nutshell it’s the growth in the value of an asset being held for investment purposes, so that asset is not for resale. A long-term holding period would indicate that the gain is capital. Currently, only half of the capital gain is taxable, while most other income is fully taxed.

In most cases the capital gain is subject to tax when the asset is sold, but there are also times when you may have to report capital gains without an actual sale occurring. For example, at the time of death there is the deemed or assumed sale of all assets, with any capital gains included in the tax return of the deceased. This would, of course, affect beneficiaries.

It’s important to note that increases in personal tax rates will also result in you paying more tax on capital gains. This is because the tax rate on capital gains is applied at the same tax rates in Canada as on employment and other income. In addition, reporting a higher overall total income would also result in more tax because a higher income puts you in the top tax bracket.

Defence # 1: Timing

So, now we see that many tax-reducing strategies primarily revolve around two things – 1) timing, and 2) reducing your taxable income. First, let’s look at timing.

If you have higher overall income from various sources in 2021, and expect lower taxable income for 2022, consider disposing of the asset(s) in 2022 wherever possible so the gain attracts a lower marginal tax rate for you.

You can also use time to advantage by deferring the cash outflow – the tax you pay to the government – and disposing the assets early in the year. Your tax bill is due April 30th of the following year, so if you sell the capital asset in January of 2022 you still have 15 months until tax must be paid on that.

Staggering gains over multiple years

Now, let’s assume you have a large capital gain. How can you stagger that gain over several years? One strategy is to defer cash receipts from the sale over multiple years. The Canadian Income Tax Act allows you to spread that gain over five years (and in some cases over ten years), provided you receive proceeds from the sale over a number of years. For example, if you receive 20% of the proceeds in 2021, you only need to include 20% of the gain in your taxable income as it can be spread over five years.

RRSPs and TFSAs

All these strategies are of a short-term nature. If the assets are disposed of in the long term, consider holding them inside your RRSP. You don’t have to declare those assets as income until you make a withdrawal. Likewise, you can use your TFSA so some of the gains are not subject to tax at all. Either way, your tax advisor can help determine if assets can be transferred to your RRSP or TFSA. Continue Reading…

Biden Presidency may be more taxing for Canadians with cross-border affairs

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By Elena Hanson     

Special to the Financial Independence Hub

Finally, the U.S. election season is behind us. But a new presidential administration typically means changes in the taxation landscape, and President-Elect Joe Biden is sure to follow suit. In fact, a Biden presidency may have certain implications for a number of people on this side of the border.

One of the proposals in his election campaign may prove especially punitive to Canadian taxpayers, especially those who hold U.S. real property or any U.S. publicly traded securities in Canadian- or U.S.-based investment portfolios, RRSPs, RRIFs or TFSAs. (Think of your shares of Apple or Microsoft, which have seen a great deal of growth in recent years with quarterly dividends literally dripping into your accounts!)

Tax implications at death diverge in the 2 countries

Hopefully, most Canadians are aware that the tax implications at death tend to diverge when it comes to Canada and the United States. In Canada, capital assets of the person who dies are subject to deemed disposition on the person’s terminal tax return, unless those assets are jointly held with a surviving spouse or they go to a trust designated to the surviving spouse. If the latter two conditions apply, there will be a tax deferral and the tax to be paid only happens when the surviving spouse dies.

In the U.S. non-American citizens are taxed on the market value of their U.S. assets held at the time of death if the total value of such assets exceeds USD $60,000. Interestingly, that $60,000 threshold was set up back in the 1980s and is not subject to any adjustment for inflation. This clearly demonstrates that foreign taxpayers are quite low on the priority list for policy makers in that country.

In addition to this incredibly low filing threshold, there is no deferral permitted upon the death of the first spouse. There is also a presumption that the person who died, the decedent, owns 100 per cent of the couple’s property and must be taxed on the entirety of the couple’s U.S. assets in excess of the $60,000 exclusion.

Now this is where salt gets rubbed into the wound. The executor of the will may be required to look back over the preceding three years – prior to the passing of the person – to determine if they had gifted in any of those years. If so, the value of the gifted property would have to be brought back for tax purposes.

Canada-US Income Tax Treaty provides some relief for Canadians

Luckily for Canadians, the Canada-U.S. Income Tax Treaty overrides harsh provisions of American domestic law. For example, Article 29-B of the Treaty allows taxpayers to avoid U.S. taxation (but they still must file tax returns if the value of the estate exceeds the $60,000 exclusion) if the worldwide market value of the property of the deceased is less than USD $11.58 million (2020 rates). That exclusion is doubled if the assets are jointly held with a surviving spouse. But this generous escape hatch is not automatic; the person in question, a U.S. non-resident, must file their non-resident estate tax return within nine months of the date of death.

Now, let’s get back to the recent U.S. election outcome and why it matters to Canadians. With Joe Biden as President of the United States, that exemption of USD $11.58 million is expected to be lowered quite significantly, and may happen as soon as January 1, 2022. In fact, it may even happen in 2021 following Biden’s inauguration, although it is unlikely that exclusion would be the first tax reform the administration will choose to focus on.

At this point, we do not know how much the exemption will be lowered. Based on changes to the U.S. estate tax over the past two decades, it has already been adjusted at least three times. In 2003, it went from $600,000 to $1 million, then in 2009 to $3.5 million and one year later in 2010 to $5 million. It is likely that the exemption will revert to either the 2009 or 2010 level, subject to adjustment for inflation. Continue Reading…