This is not the first time taxpayers with corporations have experienced tax changes. In 2018, the introduction of tax on split income significantly reduced the ability to split dividend income amongst family members. This led to tax increases for some families who had become accustomed to sprinkling dividends amongst multiple family members to pay less combined tax.
The changes to corporate tax in recent years have made it more compelling for incorporated business owners to consider withdrawing money from their corporations instead of accumulating it. Corporate tax rates are generally 9% to 12.2% for small-business owners, depending on their province or territory of residence.
This tax deferral opportunity compared to paying out a salary or dividends to an owner-manager is compelling. But the higher tax rate on corporate capital gains tilts things even more in favour of taking extra corporate withdrawals to contribute to personal investment accounts like RRSPs and TFSAs.
Should you trigger capital gains tax before June 25?
If a corporation has deferred capital gains on appreciated investments it intends to sell within the next five to 10 years, it may be better off triggering capital gains prior to the proposed deadline. The dollar amount of income tax payable to sell investments after June 25 will be about 33% higher than before June 25.
It bears mentioning that the budget stated that the higher capital gains inclusion rate would apply to dispositions that occur on or after June 25.
On May 27, 2024, Canadian and U.S. securities markets moved to a so-called T+1 (trade date plus one business day) settlement time. As such, a trade would need to settle by June 24, and this likely means having to sell by Friday, June 21 to qualify for the lower capital gains inclusion rate.
What other tax changes may the future hold for Canadians?
These recent tax changes may have taxpayers wondering what else is coming. The truth is we simply don’t know. But if I had to pick one thing married or common-law Canadians could proactively consider to protect themselves from potential higher taxes in retirement, it would be to contribute to a spousal RRSP.
If you have a big difference in your RRSP balance or pension income relative to your spouse, the spouse with more assets or income can contribute to a spousal RRSP owned by the other spouse. The contributor gets the tax deduction, and the contributions reduce their RRSP room. The spousal RRSP account holder can take the future withdrawals.
Discussion about this post