Do nothing. This is a good tax strategy that many taxpayers targeted by Chrystia Freeland’s measure would benefit from, surprisingly.
This strategy quickly became evident in the eyes of tax specialist Stéphane Leblanc, from EY, present alongside me in Ottawa in the budgetary session. Other readers told me about it, including UQAM finance professor Richard Guay, following my column “How to avoid the Freeland tax for heirs,” published Thursday.
The avalanche of emails received confirms to me that the issue concerns readers, although it affects relatively few taxpayers. I explained in the column that elderly taxpayers who have a large unrealized gain have an interest in planning their affairs to minimize tax at death, so that their heirs do not suffer, if that is what they wish. .
At death, remember, taxpayers must pay taxes on all their income and gains before being transferred to heirs. The Freeland tax therefore risks affecting many inheritances.
To avoid this, the column discussed gradually liquidating the earnings each year to fall below the threshold of $250,000 above which the inclusion rate increases from 50% to 66.7%. The tax savings could reach $87,500 over four years in the case of an unrealized gain of $1 million1.
Other individuals – not necessarily for the estate – might want to liquidate before the inclusion rate increases from 50% to 66.7%, on June 25.
However, these strategies obviously depend on the number of years that properties with capital gains exceeding $250,000 are planned to be kept, whether they are chalets, plexes or shares. Or even the life expectancy of the taxpayer, in the case of the elderly.
For what ? Because by liquidating assets more quickly (shares on the stock market or others), the taxpayer must pay taxes that he would defer if he did not sell. And these unscheduled payments to the taxman would have yielded returns each year, so that after a few years, the returns may outweigh the tax savings.
In short, for individuals with well-stocked wallets who are not too advanced in age – or who plan to live for several more years – it may be more profitable to let capital gains accumulate and therefore defer the tax, a bit like an RRSP. In short, to do nothing.
Twelve years
Richard Guay, from UQAM, did the calculation based on certain realistic parameters (portfolio yield, added value of the chalet, etc.) in the case of the progressive sale strategy to minimize the heirs’ tax.
And he believes that it is preferable NOT to gradually liquidate the property if it is planned to be kept for more than 12 years.
Below five years of total liquidation, the progressive sale tax strategy is clearly advantageous. After 12-15 years, absolutely not. In between, other non-financial factors should be considered, where applicable.
Richard Guay, finance professor
These non-financial factors apply in particular if the property is a chalet, for example. Gradually handing over your chalet to heirs (and thus triggering capital gains) should not lead to family disputes. And notary fees must be taken into account, although they remain significantly lower than the expected tax gains.
In other words, retirees who expect to die in several years would be better off forgetting this strategy.
Regardless, tax expert Jean-François Thuot, of PwC, argues that the taxpayer who uses this strategy must choose wisely which investments to liquidate to pay the taxes generated during subsequent sales providing a gain below the annual threshold of 250,000 $.
“It’s a safe bet that our retiree has a diversified portfolio and will probably use cash on which the after-tax return is low,” says Mr. Thuot.
As you see, the change of any tax rule results in various reactions from taxpayers, hence the importance for the authorities to act with tact. Targeted taxpayers would also benefit from validating any strategy with their tax professional, who takes into account all facets of their situation.
Those who are offended by these reactions to the Freeland tax should not. It is the behavior expected of well-heeled taxpayers (and their companies) before the June 25 deadline that will allow the federal government to pocket 6.9 billion more in taxes this year.
Remember that the federal measure, which Quebec will harmonize, does not target primary residences. And that the new inclusion rate of 66.7% will apply to gains exceeding $250,000 for individuals (and without this threshold for corporations), regardless of when the property was purchased in the past. This application led former federal Finance Minister Bill Morneau to say that it was a retroactive tax.
1. Read the column “How to avoid the Freeland tax on heirs”