The income tax rate on capital gains is currently half the rate that applies to ordinary income, because you only include 50% of your capital gains in your income. The following chart compares the 2017 combined Federal & Alberta personal income tax rates for the top tax bracket (income over $300,000).
|Ordinary Income||Eligible Dividends||Ineligible Dividends|
In 2015, the Federal Liberal government was elected on a platform that included modifying or eliminating certain tax benefits and tax credits that primarily benefited the wealthy, and increasing income taxes on the top 1% of income earners. That platform is fueling speculation that they may increase the tax rate on capital gains in the coming 2017 Budget. There was similar speculation in the weeks leading up to the 2016 Budget, but the rate was not increased last March.
In the past, the capital gains inclusion rate has been 75% and 2/3. If the 2017 Budget increases the inclusion rate to 75%, the Alberta combined top tax rate on capital gains would be 36%, or 32% for a 2/3 inclusion rate. Regardless of what tax bracket you are in, raising the inclusion rate to 75% would increase the tax on your capital gains by 50%. Raising the inclusion rate to 2/3 would increase the tax on your capital gains by 1/3.
No one can say for sure if or when the capital gains inclusion rate will increase. Prepaying income tax to avoid a rate increase that does not happen would be expensive. So, what should you do?
Capital gains are taxed when you sell or dispose of a capital asset that has increased in value since you acquired it. Do you expect to realize a significant capital gain in the near future? You may be able to avoid a tax increase by crystalizing that gain before the 2017 budget because income tax increases generally are not retroactive.
If you are not already planning to sell or dispose of an asset with an accrued gain, you may be able to protect yourself from a rate increase depending on your personal situation.
Tax planning you have set up for your current income, the succession of your business, or passing on of your estate to the next generation could all be affected by an increase in the capital gains inclusion rate.
We recommend that you get professional advice specific to your personal situation from your tax adviser.
Winter 2017 DFK Newsletter Article
Other articles in this issue: Potential GST/HST Surprise for Medical Practitioners | Bonus Payable In Shares | More Fallout from the Graduated Rate Estate (“GRE”) Tax Rules
Author: John Connolly, BBA, CPA, CMA – MRSB Group