Will the change in the capital gain inclusion rate have any implications to estate planning?  For taxation years that end after June 24, 2024, the capital gains inclusion rate increased from one-half to two-thirds and the change will have some implications in estate planning. Advisors will need to adjust some of their advice and recommendations in light of the changes.  This article will highlight some of the implications resulting from the change.

Larger Capital Gains on Death

The Canadian tax rules deem an individual to dispose of all their assets at the time of their death. Consequently, most Canadians have their largest capital gains triggered on death.  If the deceased’s capital gain exceeds $250,000, the excess will be taxed at a two-thirds inclusion rate, resulting in additional tax owing by their estate.

Minimizing the capital gain on death is key to any estate plan.  Some well-established strategies, such as an estate freeze or crystallization, may be options worth considering.  Life insurance to fund the increased tax exposure may also be considered so to preserve the assets of the estate (such as a rental property, as an example).

Capital Gains Earned by a Trust

Except for a Graduated Rate Estate or a Qualified Disability Trust[1], any other trust triggering a capital gain will have the gain taxed at a two-thirds inclusion rate. This is particularly relevant to life interest trusts (i.e. alter ego trust, joint partner trust and spousal trust) and testamentary trusts, unless the trust distributes the net taxable capital gain to the individual beneficiary(ies) who can take advantage of their $250,000 individual threshold.

Advisors cannot ignore the potential capital gains triggered at the trust level when suggesting the introduction of a trust to the estate plan.

[Alternative minimum tax ought to also be considered]

Post-Mortem Tax Planning Considerations

The increase of the capital gain inclusion rate also impacts post-mortem tax planning.  It will be key to consider the corporation’s attributes in assessing whether the estate should implement the pipeline strategy or the loss-carryback strategy. It is nearly certain that the changes to the capital gain inclusion rate will result in an increased tax rate to the estate regardless of which post-mortem strategy will be implemented; time is of the essence and seeking tax advice early is key.

The stop-loss rule was also impacted; the “50% solution” is changing to the “33.33% solution.” This may require a review of the estate plan involving corporately-owned insurance as part of the tax minimization strategy at death.

Capital Dividend Account

The capital dividend account may now be even more important to estate planning.  Any estate planning strategy that can increase the capital dividend account is likely worth considering. Corporate charitable donations may merit a review in some instances albeit it likely comes at a cost to the corporation – but providing for the community as opposed to the government coffers may be more acceptable to some business owners.

Conclusion

Estate advisors need to appreciate the implication of the change of the capital gains inclusion rate in estate planning.  It may require a review of some of the well-established strategies and the clients’ existing insurance coverage (especially if the insurance was to cover the capital gain on death).  Wealth preservation as part of the estate plan starts with minimizing taxation at death.

[1] The legislation confirmed there are two exceptions to this rule, Graduated Rate Estates and Qualified Disability Trusts which will still be provided a 50% capital gain inclusion rate on the first $250,000; just like individual taxpayers.