With the 2024 Federal Budget increasing the capital gains inclusion rate from 50% to 66.67%, significant changes are underway for individuals, corporations, and trusts in Ontario. This shift introduces higher tax burdens for those realizing gains over $250,000 annually, and for corporations on all gains, making it critical to reassess estate planning strategies. Life insurance plays an even more vital role in minimizing the impact of these tax increases and protecting your wealth.
A Recap of the 2024 Capital Gains Tax Changes
Previously, only 50% of capital gains were taxable, allowing investors to retain a larger portion of their profits. However, with the new rules, two-thirds of your capital gains are now included in your taxable income once they exceed $250,000 for individuals, and for every dollar of gain within a corporation or trust. This directly impacts profits from assets like stocks, real estate, and other investments.
For instance, if you realize a $100,000 profit in your corporation today, $66,667 will be taxable, compared to the $50,000 under the previous rules. This translates into a higher tax bill.
For a detailed explanation of these changes, take a look at our previous blog post [here].
Without proper planning, death can be the most expensive tax event an individual in Canada might experience.
From the Government of Canada website: A person who died is considered to have disposed of all the property they own right before death. This is called a deemed disposition. If the person who died owned capital property (such as real estate, investments or personal belongings), the deemed disposition can result in a capital gain or capital loss.
There are important tools available to Canadians to assist in planning to minimize taxes and to pass on a greater portion of an estate to beneficiaries including family or community.
One of those tools is life insurance.
Why Life Insurance is Essential Considering These Changes
As capital gains taxes rise, the importance of life insurance in estate and tax planning increases. Here’s how life insurance can provide a strategic advantage:
1. Creating Estate Liquidity
Settling an estate often requires liquid assets, and with the capital gains inclusion rate hike, more of your estate could be subject to taxes. Life insurance can provide an immediate source of liquidity, enabling your beneficiaries to pay any tax liabilities without the need to sell or leverage key assets at the wrong time.
2. Tax-Sheltered Growth with Permanent Insurance
Permanent life insurance policies, like whole life or universal life insurance, offer the benefit of tax-sheltered growth. Profits generated within these policies are protected from capital gains taxes, and upon death, may be entirely shielded from tax. This makes them a powerful tool for high-net-worth individuals and business owners looking to maximize the value of their estate.
3. Protecting Family Assets
The new capital gains inclusion rate can create a significant tax burden when passing on business or property to your beneficiaries. Life insurance can help cover these taxes, allowing you to transfer assets seamlessly to the next generation, without the financial strain of selling assets to cover tax bills.
Corporate-Owned Investments: The Hidden Impact
Corporate investments are particularly affected by the capital gains tax changes. Corporations, especially those owned by professionals like physicians and dentists, don’t benefit from the $250,000 individual exemption. That means every dollar of capital gain is taxed at a two-thirds inclusion rate, reducing the value of corporate investments.
Life insurance offers a way to offset this impact. By integrating corporate-owned life insurance into your financial strategy, you can protect against these new tax burdens, ensuring your company’s wealth remains intact.
Family Enterprises
Family enterprises also face similar challenges under the new capital gains tax rules. While the Lifetime Capital Gains Exemption (LCGE) was increased to $1.25 million for qualified small business shares, gains over and above those amounts may now be taxed more heavily. Family businesses risk seeing their generational wealth diminished. Life insurance can be an important tool for family enterprises to plan and mitigate some of the tax impacts of the increased capital gains, and to ensure that more of their wealth is preserved for future generations.
Real Estate Investors
Individuals or corporations that own multiple real estate properties are likely to be significantly affected by the recent changes. Imagine a property investor with multiple rental properties who now faces a much higher tax burden when selling, particularly if gains surpass the $250,000 threshold. Without proper planning, they may be forced to sell properties to cover these taxes.
By incorporating life insurance into their estate plan, the investor could generate the liquidity necessary to pay these taxes upon death, allowing the real estate portfolio to be passed down without requiring the sale of assets. This not only preserves the legacy but also avoids unnecessary financial strain on their family.
Conclusion: Life Insurance as a Financial Strategy
The 2024 capital gains tax changes bring a new set of challenges, but with the right strategies, they can be effectively managed. Life insurance offers a reliable way to address these rising tax liabilities, protect your wealth, and preserve your estate for future generations.
At Tall Oak, we specialize in creating personalized financial strategies that include life insurance, tax planning, and wealth preservation. If you’d like to explore how life insurance can help you navigate these new capital gains tax rules, please don’t hesitate to reach out to your Tall Oak team.
The views expressed in this commentary are those of Tall Oak Capital Advisors as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Statistics, factual data and other information are from sources Tall Oak believes to be reliable but their accuracy cannot be guaranteed. This commentary is intended for distribution only in those jurisdictions where Tall Oak Capital Advisors are registered. Securities-related products and services are offered through Raymond James Correspondent Services Ltd., member Canadian Investor Protection Fund. Insurance products and services are offered through Gryphin Advantage Inc., which is not a member-Canadian Investor Protection Fund. This commentary may provide links to other Internet sites for the convenience of users. Tall Oak Capital Advisors is not responsible for the availability or content of these external sites, nor does Tall Oak Capital Advisors endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Tall Oak Capital Advisors adheres to.
