Capital gain planning for Canadian private corporations and their shareholders has become a more taxing math exercise post 2024 federal budget. There is plenty to consider given that capital gains earned in a corporation will have an inclusion rate of 66.67 percent versus the 50 percent inclusion rate for individuals. However, at the personal level, only the first $250K of capital gain in any given year will enjoy the 50 percent inclusion. Capital gains above $250K will be also taxed at the 66.67 percent inclusion rate. To add further complexity, capital gains earned in an RRSP is ultimately subjected to 100 percent inclusion rate while a capital gain earned in a TFSA is 100 percent tax free.

Types of Investments

Below is a list for the shareholders to consider with respect to the type of investment and the placement of the investment:

• Publicly traded stocks with huge appreciation potential should be held in a TFSA as 100 percent of the gain in a TFSA is tax sheltered even when withdrawn. 

• Since 2024 TFSA contribution room is only $7K, consider holding them personally if no TFSA room is available.  Stocks can be easily liquidated to trigger gains such as to use the $ 250K annual room and to stay below this annual room.  Stocks can be easily reacquired with a higher tax cost base.   Stocks trading costs are low to facilitate tax planning.  The downside of this plan is taxes will be incurred as stocks are sold at a gain.  

• Fixed income products should be held in an RRSP when possible.   Fixed income products generally do not enjoy huge capital gains appreciation.  The RRSP exit strategy should include the margin personal tax rate that the withdrawals will be subjected to and the possible OAS clawback as a result. 

• The corporate retained earnings can be used to hold real estate.  The nature of real estate is a long-term investment.  It is costly to buy and sell real estate.  There is property transfer tax when real estate is acquired.  There is selling cost when real estate is sold.  Also, real estate ownership can be expensive with unexpected high mortgage rates and repairs that can persist for many years.  Real estate requires downpayment to purchase.   Hence, a corporation with its lower corporate tax rate is much more able to cope with the negative cash flows that may accompany real estate investments.  When one sells one piece of real estate, the gains could be very large, which if held personally, will only benefit the first $250K gain.  Hence, it makes intuitive sense to hold real estate in the corporation.

Mew & Company Vancouver Tax Advisors For Canadian Businesses

Above general discussion assumes that the shareholder will have a diversified asset portfolio.  Allocation could change due to factors such as age, income splitting opportunity, income level, risk aversion, return on investment, etc.   Your tax advisor can assist you with a detailed calculation to determine which allocation is best for you and family.