Investors looking to unload assets such as stocks, bonds or investment properties are considering selling – soon – based not just on the recent run-up in value, but also the threat of a potential increase in taxes paid on the capital gains in the upcoming federal budget.
Today, capital gains on investments outside of a registered account are taxed at 50 per cent. There is speculation across the financial services industry that the Liberal government might increase the amount taxed to two-thirds or even 75 per cent, where it has been in the past, to try to raise billions in new revenue. The Liberal government has been reviewing tax credits in recent months, with a focus on Canada's highest income-earners.
If a change is made in the upcoming budget, it's unclear if it would be effective immediately, be retroactive or start at a future date. That has some investors reviewing their portfolios with money managers, financial advisers and tax experts to see if it makes sense to sell some assets now, before the budget is tabled in the coming weeks.
"We aren't running around triggering everyone's capital gains in anticipation of this, but at the same time, we have to be mindful that there could be this change in the budget," says Ross McShane, vice-president of financial planning at Doherty & Associates, an investment management firm in Ottawa.
"In certain situations … given that markets have been on a pretty good roll and there are accrued gains – and in some cases a need to rebalance portfolios – we're considering potential changes to the inclusion rate when we are rebalancing, whereas in the past we may not have."
The so-called capital-gains inclusion rate fell to 50 per cent in 2000, which is the same rate as where it started when it was first put into effect in 1972. The rate rose to 66.67 per cent in 1988 and was at 75 per cent during the 1990s.
For example, today, if an investor in the top tax bracket in Ontario sold $100,000 worth of shares and it triggered a $50,000 capital gain, they would pay about an extra $6,700 in tax if the capital-gains inclusion rate were to rise to 75 per cent from 50 per cent, or about $20,000 in taxes, up from $13,300.
Mr. McShane says selling some investments now is a consideration largely for investors who need the funds in the near term.
For instance, he's working on a financial plan for a couple with assets in various registered and non-registered accounts, and is considering selling some of the non-registered assets now to rebalance the portfolio, given the recent uptick in markets and the possibility that there could be an increase in capital-gains taxes.
"We may well want to trigger those gains sooner rather than later knowing we are going to use that money over the next couple of years anyway," he says. The thinking is, "Let's take the gains now just in case the tax is higher later."
Selling an investment now might not be a bad move for some investors, even if the government does nothing, given that stock markets in North America are trading near record highs and house prices in most cities across Canada have appreciated significantly over the years, especially in the Greater Toronto Area and Metro Vancouver. Some investors, especially the wealthier baby boomers, are looking for opportunities to divest assets to raise money for retirement, as well as transfer money to the next generation.
Dino Infanti, a tax partner and national leader of the enterprise tax practice at KPMG LLP, says investors thinking of selling investment assets need to consider the amount of the gain and other costs of selling beyond taxes, to ensure it makes sense.
That includes legal fees and real estate commissions when unloading an investment property, as well as tripping taxes such as GST or HST, depending on what province you're in. With securities, there may be selling commissions.
"No doubt there's the potential for the tax save [if the capital-gains inclusion were to go up], but you want to be careful about any other types of costs that can start to chew away at that … potential save," Mr. Infanti says.
"I think the discussions need to be had, but all aspects need to be considered," says Mr. Infanti, adding that investors "never want to do transactions solely for tax purposes."