What physicians need to know about the new capital gains tax changes

The federal government introduced a new capital gains inclusion rate on June 25, 2024, increasing the previous rate from 50% to about 67%. If you’re an incorporated doctor, or have various investments, this rate change is going to shake up your finances. But what does a rate change mean? And how exactly is it going to change what you pay in tax? What is a capital gain?A capital gain is an increase in the value of an asset you own, such as stocks, bonds, rental properties, cottages and business assets.You solidify a capital gain when you sell something for more than what you paid for it originally. The gain comes from subtracting the original purchase price from the price it sold for later.How are capital gains taxed?Capital gains are claimed as income on your tax return. The percentage of capital gains that would be added to your reported income is called the capital gains inclusion rate.There’s no one-size-fits-all rate on capital gains in Canada. How much you get taxed all depends on your income, and where you fall within your provincial income tax bracket. Put simply, the more you earn, the more you’ll be taxed.Before June 25, this rate was 50%, or half the amount of whatever your capital gain was. This half would be added to your taxable income on next year’s tax return. Now, however, the rate has increased to two-thirds of your capital gain. This new rate change only affects individual capital gains over $250,000, so anything under this amount will still be taxed at the previous rate. But there are slightly different rules between individual capital gains (such as selling a stock) and corporate capital gains (such as selling a building). Individual capital gainsLet’s say you bought a stock today and paid $1,000 for it, and tomorrow you sold it for $2,000. Your capital gain would be $1000, and half of that—$500—would then be part of your taxable income. However, with the new inclusion rate, two-thirds of what you gained would now be added to your taxable income—in this example, that’d be $667. “But in many cases, we’re not talking in low dollar amounts—we’re talking million dollar capital,” says Stephen Hunt, director of Financial Planning at MD Financial Management. “It can blow up pretty quickly.”Navigating a capital gains rate change is a little more manageable on the personal side, though.“There are a lot of planning opportunities available to manage or keep your capital gains under $250,000 a year,” says Hunt. “You can sell little bits of an investment underneath that threshold to trigger the lower capital gain rate, and spread it out over a few years. Or, if you’re in a couple and hold joint investments, each of you get the $250,000 limit, so you have some room to spread out your gains there.”Corporate capital gainsIt’s a different story for those with corporations. They don’t get that $250,000 limit; they’re taxed at the first dollar. So any capital gain a corporation makes will now be subject to the new capital gain inclusion rate—meaning two-thirds of the gain will be added to taxable income.Because of this, “we don’t really have the same planning opportunities as individual gains,” says Hunt. “If I own a $2 million building and want to sell it, it’s kind of hard to sell part of it, right? It’s an all-or-nothing transaction.”That also means there are “a host of implications” for doctors with corporations, says Elliott Stone, CPA, CA, and president of MD Tax Physician Services. “These are clients who have self-funded pension plans or sizable investment portfolios, which will be significantly impacted,” he says. “It affects how much income you thought you had for retirement. You might think you had a net of a million dollars [from a capital gain], but now you have 10%-to-13% less.”But not all is lost. Stone says he isn’t advising clients to “do anything drastic,” because at the end of the day, “they’re still entitled to the tax deferral benefits of their corporation.”Hunt agrees, noting that “because the tax rate on active business income in a corporation is much lower than a personal tax rate, a physician who is able to leave money in a corporation will benefit from the fact that they will be able to save more in their corporation than they would personally.”Planning your finances around the new rateDiversifying your income and savings strategies are the best way to ride out the waves of this newest rate change, and any others that may come up in the future.“We’ve always recommended things like utilizing your RRSP, your TFSA, contributing to CPP, accessing the Medicus pension plan,” says Hunt. “Being spread out over different pots of money, so to speak, reduces the risk of any policy change.”However, every physician’s circumstances will differ, and financial advisors and accountants are useful allies in determining what if best for your individual finances. “It’s very prudent for a physician to ask their advisor about what their retirement income sources are and ensure that they have a good mixed amount of them,” says Hunt.

What physicians need to know about the new capital gains tax changes

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