As of June 25, of this year, the inclusion rate on realized capital gains will increase from 50% to 66% starting at $250,000. We are talking here about taxable personal accounts, excluding RRSPs, TFSAs, and other non-taxable accounts. On the other hand, management companies and trusts will be taxed at an inclusion rate of 66% from the first dollar of capital gains realized.
What Does This Imply?
On the one hand, this new rule mainly affects the wealthiest investors. For example, if we assume that a portfolio of stocks achieves annual gains equivalent to 10% of the value of a portfolio, we are talking about portfolios with a value of $2.5 million or more. In such an example, the annual tax bill will increase from $66,625 to $87,945, assuming the maximum marginal rate of 53.3%. Ouch!
What to Do If You are Part of This Category of Investors?
The first consideration would be to make gains on securities in your portfolio before June 25. Crystallization (i.e., selling and repurchasing a security immediately to realize the latent gain) is an option that many will consider between now and June 25.
A good idea? In my opinion, no. At least not if you are a long-term investor who holds on to your stock holdings for a long time. On the other hand, if you were already thinking of selling a security in your portfolio (with a gain), perhaps it would be worth doing so before June 25.
For the rest of your portfolio, I believe you will need to adopt a more “long-term” focused strategy and hold your securities even longer to postpone the tax bill as far as possible.
In your personal accounts, it will also be worth limiting your annual earnings to less than $250,000. Taking losses at the end of the year to reduce gains will likely gain momentum from 2024.
While I don’t like these new rules, I don’t think they change the long-term attractiveness of stocks. Who knows, this measure from the federal government will perhaps have the positive effect of pushing even more investors to think long term and hold on to their stocks even longer? If so, it might be a blessing in disguise.
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