Ninety-nine point eighty-seven percent of Canadian investors can breathe easy after this week's federal budget announcement. The plan to increase the inclusion rate for capital gains over $250,000 annually will primarily affect only a tiny fraction—0.13 percent—of taxpayers with average incomes hovering around $1.42 million, as stated by the federal government.
For those unfamiliar, capital gains are the profits earned when an investor sells assets like stocks, properties, or businesses. The inclusion rate signifies the portion of these gains subject to taxation at the filer's marginal rate.
Concerns about potential hikes in the capital gains tax have lingered since the minority Liberal government assumed power. However, there are viable strategies for retirement investors to sidestep such tax burdens.
One savvy tactic involves strategic investing through registered accounts. Among these, the tax-free savings account (TFSA) stands out as the most tax-efficient avenue. In a TFSA, capital gains and other income remain untaxed, offering a sheltered space for investment growth.
Notably, the TFSA contribution limit saw a recent expansion of $7,000 at the start of the year. This means additional room for contributions, particularly advantageous for Canadians who haven't maximized their previous contribution allowances. Over time, the TFSA's cumulative contribution limit since its inception in 2009 has reached a substantial $95,000.
Moreover, pairing a TFSA with a registered retirement savings plan (RRSP) can enhance tax planning for retirement. While RRSP contributions are deductible from taxable income and grow tax-free, withdrawals are subject to taxation at the individual's marginal rate. By strategically combining RRSP withdrawals with tax-free TFSA funds, retirees can minimize their overall tax obligations significantly.
Both RRSPs and TFSAs offer diverse investment options, spanning stocks, bonds, mutual funds, and ETFs. However, it's crucial to note that investments held in non-registered accounts cannot be directly transferred to registered accounts. Investors must first sell these investments, incurring applicable capital gains taxes.
Nevertheless, capital losses from equity sales in non-registered accounts can offset capital gains within a three-year window or in the future.
For those eyeing second properties as investments, caution is advised. While capital gains on primary residences remain untaxed, additional properties such as cottages or rental units incur capital gains tax upon sale. Under the new rules, gains exceeding $250,000 will face a two-thirds inclusion rate.
To diversify real estate exposure without tax implications, investors can explore real estate investment trusts (REITs) within their TFSA—an alternative route to property investment.
In essence, while changes to capital gains tax rates may raise concerns, strategic planning and leveraging registered accounts can help retirement investors navigate these waters with confidence, ensuring tax-efficient wealth accumulation for the golden years ahead.
