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Wishing you joy, peace, and prosperity this festive season.

Warmest Regards,
Lee Smallwood

The temporary GST/HST break on qualifying goods/services will take place from December 14, 2024, to February 15, 2025. Here are some key details you need to know.

Realizing capital gains for CCPCs before June 25 -2024
Business owner’s compensation is one of several factors to consider
By Benjamin Felix and Mark Soth | May 8, 2024 | Last updated on May 8, 2024
5 MIN READ

AdobeStock / Jacob Lund
Budget 2024’s proposed increase in the capital gains inclusion rate to two-thirds from one-half, effective June 25, has left many incorporated business owners and professionals wondering what to do with unrealized capital gains in their corporations.
This decision is much more involved for assets held in a corporation than it is for assets held personally. On a personally held asset, the potential tax savings of realizing a gain at the current (pre-June 25) inclusion rate is simply traded off against the loss of tax deferral by realizing the gain earlier than planned. The result boils down to a break-even number of years: if a gain can be delayed for that number of years, deferring is advantageous.
A corporation, on the other hand, acts like a dam that moderates the taxable income flowing to its shareholders. This deferral mechanism creates unique planning opportunities and makes the decision between realizing and deferring a capital gain more complex. While there is still a loss of tax deferral at the corporate level, realizing a gain in a Canadian-controlled private corporation (CCPC) may create an opportunity to defer personal taxes.
Capital gains in a CCPC
A capital gain realized in a CCPC results in corporate taxes on the capital gain, and a credit to the capital dividend account (CDA) — a notional account that can be distributed tax-free to a shareholder of the corporation. Notional accounts like the CDA are intended to achieve tax integration — a state in which investors are indifferent to realizing a capital gain personally or in their corporations.
The Budget 2024 proposals affect integration by applying the increased inclusion rate to all capital gains realized in a corporation, while providing a $250,000 threshold to earn capital gains personally at the current lower inclusion rate.
When a capital gain is realized in a CCPC, the taxable portion — currently 50%, and a proposed 66.67% after June 25 — is taxed as passive income at a tax rate close to the highest personal marginal rate. A portion of that tax is refundable when the corporation pays out a non-eligible dividend to a shareholder, who would then pay personal tax on the dividend.
The non-taxable portion of the gain is credited to the CDA. When there is a positive CDA balance, a special election can be filed to pay a tax-free capital dividend to the corporation’s shareholders. While tax-free, the gain should be large enough to justify the accounting fees required to file the special election.
Let’s look at the example of a $1,000 capital gain earned in a CCPC in Ontario before and after June 25.
Before June 25, half of the gain is taxable. There are non-refundable taxes of $97.50 and refundable taxes of $153, for a combined total of $251. The non-taxable half is credited to the CDA. When flowed through to the personal level at the highest personal rate, there is $710 remaining, for a total tax rate of 29% on the capital gain.
After June 25, two-thirds of the gain is taxable. Non-refundable taxes increase to $130 and refundable taxes to $204, while the CDA is reduced to $333. In this case, when flowed through to the personal level, there is $614 remaining, for a total tax rate of nearly 39%.
CDA and tax deferral
Looking at a corporation in isolation, there is a simple break-even calculation for whether it makes sense to realize or defer capital gains leading up to June 25, just as there is for a personally held asset. But corporations do not exist in isolation. The math changes when the dollars needed to fund the personal compensation of a shareholder are considered.
Remember from the previous example that realizing a $1,000 capital gain before June 25 in a CCPC would result in about $710 in personal after-tax dollars. To achieve the same after-tax result with non-eligible dividends at the top Ontario marginal rate would require $1,359 to be paid out, due to personal taxes being much higher; salary would require $1,529 to be paid out.
Harvesting a capital gain results in a loss of tax deferral on the capital gain in a corporation but creates a separate source of tax deferral. It reduces personal taxes payable on a given amount of after-tax spending needs. This strategy is far more effective before June 25 than after, due to higher corporate taxes and a lower credit to the CDA.
Even before June 25, this planning will not always be favourable. For example, if your personal tax rate on non-eligible or eligible dividends is below the roughly 10% paid in non-refundable corporate taxes on a capital gain, deferring the gain will look more attractive all else equal. Similarly, if the refundable portion of the taxes on the capital gain will be trapped in the corporation indefinitely due to low personal spending needs, deferring will look relatively attractive.
Other considerations
A large capital gain in a single year may shrink the CCPC’s small business deduction (SBD) threshold in the following year, increasing corporate taxes payable on net active income.
If you need to pay out more dividends in the future to access refundable taxes incurred on a large capital gain, that may come at the expense of not paying as much salary. Paying a salary comes with many other benefits, like RRSP/individual pension plan room and CPP contributions.
We have used personal spending as an example of a reason to take money out of a CCPC, but using a capital dividend is also a tax-efficient way to fund a TFSA or make personal debt repayments. Similarly, if there is a lower-income shareholder spouse, it may be possible to allocate capital dividends to them. This could allow them to invest the proceeds in their personal taxable account directly, or free up their other sources of income for saving.
How to advise clients
The capital gains inclusion rate proposals present an incredible opportunity for thoughtful planning around the use of unrealized capital gains in a CCPC.
Since we started talking about optimal compensation strategies for CCPCs on the Money Scope podcast, it has become increasingly clear that this topic is generally poorly understood and offers an enormous opportunity for practitioners to add value.
This topic spans both financial and tax planning across multiple years. Advising on it must be done in the context of an overall financial plan. In many cases, realizing — or harvesting — capital gains on assets in CCPCs before June 25 and using tax-efficient capital dividends to reduce personal taxes owing in future years may be a favourable trade-off.
We have been busy modelling how these pieces interact and fit together and will illustrate some cases in a followup article.

3 important components of a financial plan:

▪️ Specific Financial Goals
▪️ Realistic Timeline
▪️ Assessment of Financial Position

If you don’t know where you are going, how you can develop a plan to get there? If you don't know your financial position, how you can set realistic timeline to achieve your goals?

You don't need to wait until you have a lot of money to create a financial plan. You can benefit from some level of financial planning at any life stage.

Lee Smallwood - Advisor

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“The information provided does not constitute investment, tax or financial planning advice and it should not be relied on as such.”

Will there be enough income to cover your monthly expense at retirement?

We have seen increases in basic living expenses of more than four times and this will continue. If you have no additional income source at retirement, you will be living below the poverty line.

That's why it's never too late (or too early) to start a financial plan. A financial plan can help:
🔹 Identifies your money situation & financial health
🔹 Organizes your financial activities
🔹 Prioritizes your financial goals
🔹 Strategies to achieve retirement goals

📣STAY TUNED! We are introducing a four part series on how to create, execute and evaluate a financial plan with all the components to ensure your financial success.

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“The information provided does not constitute investment, tax or financial planning advice and it should not be relied on as such.”

📌2024 Financial Facts - brought to you by our insurance and investment partner Empire Life

▪ Deadlines
▪ Income Tax Rates
▪ RRSP
▪ TFSA
▪ CPP
▪ OAS
▪ GIS
▪ RRIF

Handy information to help you plan a successful 2024!
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A spousal RRSP is a type of registered retirement savings plan that's available to married couples and common-law partners. It allows couples to split their income and grow their retirement savings while lowering their tax liabilities.
▪ By contributing to a Spousal RRSP, the higher-earning spouse receives a tax deduction that could lower their personal tax bill for the year.
▪ On the other hand, the lower-earning spouse will get taxed at a lower marginal tax rate when the money is withdrawn from the Spousal RRSP.
▪ From the time a spousal RRSP contribution is made, it must stay in the account for the rest of the calendar year plus 2 more years before money can be withdrawn as the taxable income. If money is withdrawn within 3 years, it will be included in the contributor's taxable income.
▪ You can still contribute to your spouse's or common-law partner's RRSP until the December of the year that they turn 71.

❗️ The 2023 contribution RRSP Deadline is February 29, 2024

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The information provided does not constitute investment, tax or financial planning advice and it should not be relied on as such.
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👉 Things you should know about RRSP

▪️ RRSP is a Long-Term Retirement Savings vehicle
▪️ Your contribution to an RRSP reduces your taxable income
▪️ The earnings in your RRSP are tax sheltered and differed until you began to make withdraws during your retirement
▪️ An RRSP can be open at most Canadian financial institutions: banks, insurance companies or brokerage firms
▪️ Most financial institution offers a Managed RRSP Portfolio or a Self-Direct Portfolio
▪️ It’s easy to start an RRSP; you can start a plan with a contribution for as little as $25.00 per month
▪️ There is no minimum age to open an RRSP; however some financial institutions require the applicant be age of majority
▪️ Your contribution to your RRSP ends when you turn age 71, so you can continue to contribute even after you retire at age 65 as long as you have earned income and file your annual tax return
▪️ The maximum contribution limit for 2023 is 18% of your previous year income or $30,780
▪️ Find your contribution limit on the previous year Personal Tax Filing Notice of Assessments

❗️ The 2023 contribution RRSP Deadline is February 29, 2024

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The information provided does not constitute investment, tax or financial planning advice and it should not be relied on as such.
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⏳ A friendly reminder - February 29, 2024 is the last day to make RRSP contributions for the 2023 tax year!

Here are some important tax numbers for 2024 to help you plan a successful year!

Lee Smallwood
Financial Advisor