The federal government announced last week that it will table its budget on March 22nd – putting an end to the guessing game. Speculation remains rampant about possible changes to capital gains taxation.
Rumours are circulating that the federal government may increase the capital gains inclusion rate from 50% to as much as 75%. The inclusion rate is the percentage of a realized capital gain on a taxable disposition (e.g. securities, real estate, art and collectibles) that is included in a taxpayer’s income and subject to their marginal tax rate.
We should note that the governing Liberals did not campaign on or state an intention to increase the inclusion rate, but since the rumour mill has been running at full capacity, many people are wondering about its possible implications.
From our perspective, there is risk in acting on rumour. Selling securities solely based on what could happen is letting the proverbial “tax tail wag the investment dog” and may backfire if new rules are not introduced. You will have triggered a gain and accelerated tax.
There are, however, a couple of exceptions.
An obvious one is that if you hold an asset with a large accrued gain and intend to sell it anyway, it would behoove you to act now rather than after the budget. Flow-through shares are a good example as they have a zero cost base. We are reviewing these positions in the portfolios we manage.
The other is if you are nearing retirement and own stock options of a public company, as typically, taxation policy on options moves in lock-step with capital gains taxation. If you have vested options that may be expiring or represent an overweight position relative to your overall portfolio, you may want to consult with your tax advisor about exercising and selling them sooner rather than later.
Finally, there has to be some good news. If the inclusion rate is indeed raised, your tax losses will be worth more! You will have the ability to include a higher percentage of tax losses to offset your gains. So we wouldn’t recommend triggering losses until after the budget.
Please feel free to contact us if you have any questions about these discussion points or to obtain a second opinion on your portfolio holdings.