At Estately Wealth, we blend sophisticated financial planning with personalized strategies to help our clients preserve wealth, optimize corporate structures, and make impactful charitable contributions. At Estately Wealth, we blend sophisticated financial planning with personalized strategies to help our clients preserve wealth, optimize corporate structures, and make impactful charitable contributions. At Estately Wealth, we blend sophisticated financial planning with personalized strategies to help our clients preserve wealth, optimize corporate structures, and make impactful charitable contributions.
With the recent changes to capital gains inclusion rates effective June 25, 2024, many business owners and estate planners are facing new challenges and opportunities. This shift in tax policy impacts financial planning, emphasizing the critical role that insurance can play in mitigating tax burdens.
Understanding the Changes
The inclusion rate for capital gains has increased, affecting how profits from the sale of capital properties are taxed. For individuals, the first $250,000 of capital gains will continue to be taxed at the 50% inclusion rate, while any amount above this threshold will be subject to a two-thirds inclusion rate. Corporations and trusts will now face the two-thirds inclusion rate on all capital gains. This significant shift underscores the importance of revisiting financial and estate plans to adapt to the new tax environment.
Impact on Estate Planning
Consider a scenario involving a family cottage. Purchased in 1987 for $375,000, the cottage’s value had risen to $2.5 million by the time the new tax rules came into effect. Under the old rules, the capital gains tax payable was approximately $535,000. However, with the new inclusion rate, the tax burden increased by 30%, resulting in an additional $156,000 in taxes. This example clearly illustrates the necessity of strategic planning to manage increased tax liabilities.
The Role of Insurance
Permanent life insurance remains a pivotal tool for Canadians looking to safeguard their estates from significant tax liabilities. Insurance can provide the necessary liquidity to cover increased tax burdens without the need to liquidate valuable assets. In the cottage scenario, the clients had three alternatives: liquidating non-registered portfolios, saving over time, or taking a bank loan. However, purchasing a permanent life insurance policy provided a more cost-effective and certain solution, ensuring that the family could retain the cottage while covering the tax liability with an insurance payout.
Business Owners and New Rules
The new rules also significantly impact business owners, particularly those with valuable family businesses. By using estate freezes and other strategic tools, business owners can manage tax liabilities more effectively. For example, a business owner with a $10 million family business could use life insurance to ensure liquidity and minimize the tax impact on their estate. By freezing the value of their common shares and restructuring the business to attribute future growth to new common shares held by a family trust, owners can control the business while planning for a smooth transition to the next generation and mitigating tax liabilities through insurance.
Immediate Benefits of Insurance Planning
Life insurance is not only a long-term estate planning tool but also provides immediate tax benefits. For business owners generating significant passive income, reallocating funds to a universal life policy can lead to substantial tax savings. For example, a 49-year-old business owner with a holding company generating $150,000 annually in passive income can reallocate these funds into a universal life insurance policy. Over 15 years, this strategy can result in a significantly higher death benefit and greater tax efficiency compared to a traditional investment portfolio.
Act Now
The new capital gains tax rules present both challenges and opportunities. It’s crucial to act swiftly and strike while the iron is hot. Reviewing and updating estate plans, exploring insurance options, and working closely with financial advisors can help clients navigate these changes effectively. At Estately Wealth Planning, we are committed to providing our clients with the strategies and tools needed to preserve and grow their wealth in this evolving tax landscape.
For more information or to discuss your specific situation, please reach out to our team of experts. We are here to help you make the most informed and strategic decisions for your financial future.
Ready to secure your future and protect your loved ones? Book a time to sit down with us and start your estate planning journey today! Visit our calendar to schedule your consultation. We look forward to helping you achieve peace of mind.
