In its 2024 Federal Budget, the Canadian government proposed significant changes to capital gains taxation. These changes will likely materially impact some estates. It is essential to be aware of what the impact to your personal financial situation may be.
The main reason for this is the concept of deemed disposition of assets upon an individual's death, which triggers taxation on unrealized capital gains. This can have substantial implications for some estates, particularly those owning illiquid assets such as real estate, that is not the principal residence, or private corporations.
Example:
Consider a scenario where a single person bought a cottage forty years ago for $30,000. Assuming the cost (the Adjusted Cost Base) of the cottage is $30,000, the fair market value of the cottage upon death is $500,000 and it doesn't qualify for the principal residence exemption, a substantial capital gain of $470,000 arises.
Under the current rules, $220,000 would be taxable, resulting in a tax bill of approximately $126,000 (assuming the top marginal tax rate in Ontario of 53.53%) However, under the new rules, a higher inclusion rate results in a tax bill of roughly $144,640 (again assuming the top marginal tax rate in Ontario of 53.53%), representing a nearly 15% increase in tax liability on an illiquid asset.
Given these changes, it is essential for those who may be affected by these changes, typically people who own a cottage, a rental property or a private corporation, to meet with an estate professional to review their personal situation in the light of the contemplated changes. Estate Stewards would be delighted to help you.
All examples are for illustrative purposes only and are not intended to provide individual financial, investment, tax, legal or accounting advice. This material is for general information and is subject to change without notice. Every effort has been made to compile this material from a reliable source. However, we cannot guarantee that information will be accurate, complete and current at all times. Before acting on any of the above, please make sure to see a financial professional or a lawyer for advice based on your personal circumstances.