2024 Federal Budget: Capital Gains Tax

Posted on April 22, 2024April 22, 2024 by [email protected]

2024 Federal Budget: Capital Gains Tax

In the 2024 federal budget unveiled on Tuesday April 16th, the Finance Minister said the government would increase the inclusion rate of the capital gains tax from 50 per cent to 67 percent for corporations and trusts. Individuals will still have the 50% inclusion rate apply on capital gains of up to $250,000 annually, but will now be subject to the 2/3 inclusion rate on capital gains in excess of $250,000 per year.

While the Feds claim this will only affect less than 1% of the population, we strongly disagree. This will negatively affect all people who own corporations with investments, (including most small businesses) discourage capital investment in corporations (hurting innovation productivity and entrepreneurs, and the jobs they support), all estates (leaving less for their families and future generations), and all individuals with one-off significant tax events (who may be hard working, rather than idly rich).

Why is the change important?

The proposed 2/3 inclusion rate applies only to capital gains realized after June 25, 2024. That means there is a short time window to decide if unrealized gains should be realized now.

If you have significant capital investments (whether in a corporation, trust, or held personally), we recommend a consultation with one of our tax professionals to better understand the implications of this new policy on your investments, and discuss possible planning opportunities. Please note that these proposed policies are new and complex and we are watching it unfold. Our team will need some time to engage with more advanced commentary coming out from the government and tax community in the coming weeks before we can comprehensively consult in all circumstances.

If you have personal investments outside your RRSP or TFSA, you will want to analyze your portfolio to assess changes in taxation and strategy. For investments in an unrealized gains position, you may want to sell in advance of June 25 to take advantage of the existing lower tax rates on amounts over $250,000. You will also want to consider the timing of selling to limit gains in any one year to $250,000 to protect your gains from higher taxation. If you are in a loss, you may want to defer the losses until they are included at the higher rate.

If you hold a second property that you are looking to sell, you may want to crystallize a gain before June 25th to avoid higher taxes on the disposition of the property.

If you hold investments in a corporation that you are carrying at a gain, we want to consider the circumstances under which it would be advantageous for you to sell those investments, taking advantage of the 50% inclusion for taxes, and the 50% inclusion into your Capital Dividend Account (cash that can be paid out tax-free later).

Additionally, any corporations that are selling assets to reinvest in their business (by redistributing those funds into a different business or product line) will need to revisit planning for higher corporate tax rates on corporate investment dispositions, and we are happy to help with that forecasting.

For anyone with estate planning, we have a short window of time to consider changes required to recalibrate the tax exposure in the year of death where dispositions often exceed $250,000.

If you are concerned for your tax planning, we encourage you to reach out via email, and we look forward to helping you plan for your future.

Let’s look at the math:

Let’s say you’re a BC professional and part of your financial strategy is to create savings in your small corporation and draw down that corporate investment portfolio to fund your cost of living as needed. Following your annual income strategy, you examine your personal needs: with the increased cost of borrowing (interest) and groceries, kid camps etc you determine you need to sell part of your portfolio, which will trigger a $50,000 CAD capital gain. See below for our analysis and walkthrough. Under the current rules, we pay 29.50%. Under the new rules, our tax rate increased by 10%. That’s 34% more taxes! For someone who takes home an extra $30-35k a year…

Technical Walkthrough

Current Rules:

Under the current rules, half is taxable. And half goes to the capital dividend account (CDA), which can be withdrawn tax-free as a capital dividend. We now have $25k of tax-free gains, and $25k of taxable gains.
The taxable half is subject to two different taxes- one permanent , and the other refundable.
- On this transaction, you will pay 20% or $5,000 in permanent tax. Just like it sounds, you pay this, and you can’t get it back.
- You will also pay 30.67% or $7,667 in refundable tax. You can get this back by paying yourself a non-eligible dividend. (You recover 38.33% of the refundable tax for every dollar paid out as a non-eligible dividend.)
So far in this scenario, there has been approximately $12,667 in total taxes paid. Now, we have to get back the refundable tax.
To trigger a full refund, you need to pay a non-eligible dividend of $20,005 to get the refundable portion back ($7,667/38.33%). So, you pay out that refundable tax as part of that $20,000 dividend, and that dividend is taxed to you personally.
In BC, at the top rates, a non-eligible dividend is taxed at 48.9%. That leaves us with $10,220 after tax, plus the $25k tax-free dividend.

In the end, we triggered a $50k capital gain and you had $35,220 left after tax. That’s an effective tax rate of about 29.50% on our capital gain.

Proposed Rules*:

*note, these rules are newly released and not thoroughly communicated by the Federal Budget. Specifically Refund Dividend Tax on Hand, Alternative Minimum Tax, and the new proposals for integration under the income tax act are not clear. This is for analysis purposes only.

Under the proposed rules, instead of half of the capital gain being tax-free, now only 1/3rd of it is. This changes the outcome significantly. Now a $50,000 capital gain gives us only a $16,667 tax-free capital dividend, and we include $33,333 in corporate income.
The taxable half is subject to two different taxes- one unrecoverable, and the other recoverable.
- 20% is permanent, so $6700 tax paid
- 30.67% is refundable, and you pay $10,273 in refundable tax.
So far in this scenario, there has been approximately $16,666 in total taxes paid. Now, we have to get back the refundable tax.
To trigger a full refund, you need to pay a non-eligible dividend of $26,800 to get the refundable portion back ($10,273/38.33%). So, you pay out that refundable tax as part of that $26,800 dividend, and that dividend is taxed to you personally.
That dividend is taxed at 48.9%, leaving $13,694 after-tax, plus the $16,667 tax-free dividend.

In the end, we triggered a $50k capital gain and you had $30,194 left after tax. That’s an effective tax rate of about 39.6% on our capital gain.

Under the current rules, we paid 29.50%. Under the new rules, our tax rate increased by 10%. That’s 34% more taxes!

If you are a Metrics client and would like to book a consultation with your tax advisor, please email [email protected]. If you are not currently a Metrics client, CLICK HERE to complete our contact form for new clients.

Disclaimer: Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. This does not constitute legal advice. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.

New GST/HST Guidelines for NFT Sales

Posted on March 12, 2024March 19, 2024 by [email protected]

New GST/HST Guidelines for NFT Sales

Despite what many sites advertise, yes, NFTs are subject to GST/HST.

The Excise Tax Act in Canada imposes GST/HST on “every recipient of a taxable supply made in Canada”, and Canada Revenue Agency (“CRA”) has recently provided updated guidance which clarifies that NFTs, specifically, will be subject to GST/HST.

NFT sellers are obligated to collect GST/HST from Canadian buyers if they earn more than $30,000 in annual gross revenue. This means that Canadian NFT sellers who earn more than $30,000 in sales of NFTs are required to register for GST/HST and pay these taxes to the CRA.

Under CRA guidance, unless you can prove that the sale of your NFT is made outside Canada (which, given the anonymity of the marketplace, is unlikely) you will be taxed as though you sold to Canadians and collected GST/HST on your gross sales. Since you cannot identify the geographical location of your buyer you will be deemed to charge and collect GST/HST in your own province.

Why is this guidance a big deal?

Under the current Excise Tax Act, sales made to non-Canadians buyers, who do not use the asset in Canada, are not subject to GST/HST. Until now, and given the international nature of NFT sales, NFT sellers may have been assuming that all or substantially all of their sales were international, and therefore exempt sales under the Excise Tax Act (this assumption could have been supported by online knowledge of the buyers, the geographical location or mix of the online marketplace or other factors). Now, this interpretation has specified that in the absence of proof of your buyer as OTHER than Canadian, the CRA will assume they are Canadian and have GST/HST apply on 100% of your gross sales.

Furthermore, as a buyer, since you cannot identify the seller as Canadian or otherwise, and without a GST number for your purchases, you will not be eligible to claim GST/HST paid on your cost of sales for the NFT transactions.

If your NFT portfolio did not net more than your provincial GST/HST rate, you could end up in a deficit and still owe GST/HST to CRA. This is specifically relevant in Ontario and the eastern provinces that have HST of 13-15%, as the GST/HST rate charged is a direct cut off of your profit.

These excise tax considerations are the same whether the NFT sales are classified as business or capital under the Income Tax Act. Technically, for excise tax this creates a GST/HST Collected obligation for the seller in the absence of GST Paid offsetting tax credit.

Functionally, for the industry this creates a cycle where GST/HST is paid on all transactions in the Canadian NFT industry and claimable on none. Regulators view it as the downside of participating in an anonymous ecosystem. Many view it as an assault on the NFT industry in Canada.

At Metrics, we believe this interpretation creates a strong disincentive for NFT businesses to continue to operate in Canada, and especially in provinces with HST. We will continue to work with regulators including the CRA to clarify NFTs as emerging digital assets that deserve unique interpretations under the Income Tax Act and Excise Tax Acts. Until change comes, we are dedicated to working with our clients to accurately interpret the tax laws as they apply to Canadian businesses.

For all Metrics clients, we will be working with you to establish the effects of this interpretation on your portfolios.

Planning opportunities

For planning purposes, we note the following opportunities and exemptions:

• If your NFT assets are not available for sale in Canada, the impossibility of Canadian sales will exempt those sales from Excise Tax.

• If you know the NFT purchaser, and can obtain a legal address, and that legal address proves them as non-Canadian, your sales will be exempt from GST/HST.

• If there are other pressing business reasons and regulatory considerations putting pressure on your NFT business, you could consider departing from Canada. This is a major tax event that would need to be examined carefully prior to being executed.

• In our considerations of NFT activity the only current and obvious case for exemption is NFTs issued for purposes of liquidity pool ownership and same or similar mechanisms that do not satisfy the criteria for a taxable supply under the Excise Tax Act.

• Given that tax considerations are not currently built into NFT smart contracts, the amount that a seller collects will not vary. This means that NFT sellers either have to raise their prices by 5-15% (depending on your provincial GST/HST rate), or have to plan to take that same 5-15% off the top of your sales and remit the cash to the CRA.

How does this compare to similar TradFi transactions:

In traditional finance transactions, say a BC company sells two pieces of art for value of $100,000 CAD each: Art Sale 1 is to a Canadian business in Victoria BC, and Art Sale 2 to an American business in Los Angeles.

Art Sale 1: Art sold to Canadians: The price is $100,000 and GST applies on the sale of the art. In this case GST of 5% or $5,000. The seller would collect $105,000, keep $100,000 and collect and remit $5,000 to the government for GST Collected.

Art Sale 2: Art sold to Americans: The price is $100,000 and this is an exempt transaction for GST/HST. The seller would collect $100,000, keep $100,000 and collect and owe $0 to the government for GST.

In other words, the TradFi system is set up to identify all sellers and buyers and share that information. This exchange of identity allows this system to work under the current regulations.

Now let’s examine this for NFT companies, say a BC company sells two pieces of NFT art for a value of $100,000 CAD each. No identification of the buyers is available, and in the absence of availability in Canada, the NFT is deemed to be sold to a BC company and 5% GST is required to be charged on the transaction.

Art Sale 1: The price is $100,000. The seller would collect $100,000 which would be deemed to be GST inclusive at BC’s rate of 5% or $4,762. The seller will keep $95,238 and remit $4,762 to the government for GST.

Art Sale 2: is the same as art sale 1: The price is $100,000. The seller would collect $100,000 which would be deemed to be GST inclusive at BC’s rate of 5% or $4,762. The seller will keep $95,238 and remit $4,762 to the government for GST.

Income Tax Effect

Example 1:
Assume you live in Ontario, and you bought a BAYC for $100,000 CAD (equivalent in ETH), and sold it for $120,000 (equivalent in ETH at time of sale). You may have thought you made $20,000. However, based on the GST/HST discussed above, you would owe $15,600 in HST, making your net profit $4,400 (less gas costs, exchange fees, etc), rather than $20,000. When you pay the HST on this transaction, it reduces your profit for income tax purposes, so you would only pay income tax on the profit of $4,400, rather than the $20,000 pre-HST amount.

Example 2:
If you bought a BAYC for $100,000 CAD (equivalent in ETH), and sold it for $1,200,000 (equivalent in ETH at time of sale) in Ontario, you would owe $156,000 in HST, making your net profit $944,000 (less gas costs, exchange fees, etc), rather than $1,100,000.

So, regardless of the price/profit when sold, the HST has the same effect. You would pay income tax on the net profit only, after the HST has been considered.

Learn More from Metrics

The digital world has witnessed an exciting and revolutionary development: the rise of non-fungible tokens (NFTs). Unfortunately, the cutting-edge nature of NFTs means that many NFT makers, buyers, sellers and investors are unaware of their tax obligations. Additionally, interpreting the current and evolving regulatory landscape can be extremely complicated. If you are looking for answers regarding NFTs and Canadian taxes, you can learn more by contacting us at [email protected].

If you need help navigating NFT taxation and reporting, CLICK HERE to book a consultation with our team.

Introducing the Metrics Education Series

Posted on September 11, 2023September 15, 2023 by [email protected]

Introducing the Metrics Education Series

It’s back to school time and as lovers of education, we are eager to announce our new Metrics Education Series! Every Wednesday for the next four weeks, we will be hosting an online, real-time education session with one of our professionals. Through this series, we aim to provide value-added education services exclusively for our clients and free of charge.

Our aim is to provide our clients with education, insights and knowledge in the realms of tax planning and business intelligence, enabling them to make higher quality decisions that shape the future of their business.

Series 1: Finance for CEO’s

Hosted by Regan McGrath CPA, CA
Regan McGrath is the founding partner and CEO of Metrics Chartered Professional Accounting where she has grown the firm into a national leader in the cryptocurrency space and leads the CFO services business.

In this two part series, Regan McGrath CPA will teach an introduction to finance for CEO’s covering the following topics:

Financial Literacy: How to read financial statements.
Financial Ratios and Key Metrics: What they are, and what they mean.
Becoming a Data-Driven CEO: Using real-time data to become a better CEO.
Cap Tables: What they mean, and how to read them.
Financial Storytelling: Ensuring your pitch matches your financial model.
Top 10 CEO Questions: The top 10 questions CEO’s ask their CFO/tax accountant.

This series will be taught over two sessions via Google Meet on Wednesday, September 13 and Wednesday, October 4, from 12:00 – 1:00 p.m. (PST).

Series 2: Tax Planning Opportunities

Hosted by Sulaiman Mirani CPA
Sully is the Senior Tax Manager at Metrics with a wealth of experience in tax planning and financial advisory. He has worked with clients across various industries providing strategic tax solutions to help businesses achieve their present and future goals.

Sully will teach an introduction to tax planning opportunities aimed at business owners, investors or individuals thinking of incorporating. Topics include:
The use of a corporation.
Adding a holding company vs having a sister company.
Family Trusts.
Purification of a company.
Taking out funds from your corporation:
- Salary vs Dividends.
- Dividends vs. Pref Gains.
- CDA’s: The Capital Dividend Account.

This series will be taught over two sessions via Google Meet on Wednesday, September 20 and Wednesday, September 27, from 12:00 – 1:00 p.m. (PST).

If you are a Metrics client, you will have received an invitation to join these sessions via email. If you have not received this email, please contact [email protected]

If you are not a Metrics client but would like to discuss tax planning opportunities for your business, you can CLICK HERE to contact us and book an introductory meeting with our team.

Why Incorporate Your Professional Practice?

Posted on July 27, 2023October 12, 2023 by [email protected]

Why Incorporate Your Professional Practice?

A professional corporation is used when individuals run their own practice and wish to provide their professional services through a corporation for the reasons mentioned in this article.

Incorporating your practice has many advantages; the main one is being able to defer your taxes. A corporation becomes useful when your earnings exceed your living requirements in a year.

Canadian taxes use a marginal rates system. As your personal income increases, so do the tax rates, resulting in higher taxes on higher income. The top tax bracket in British Columbia is 53.5%. The corporation tax rates are 11% on the first $500,000 and 27% beyond that.

For example, assume you earn $250,000 personally in a year but only require $100,000 to live. You then have $150,000 in excess earnings on which you pay personal income taxes. Your personal tax rate would generally be higher than that of a corporation. With the use of a corporation, the excess of $150,000 can remain in the corporation.

Though the corporation is subject to tax, the tax rates are significantly lower. In the example above, you can defer more than $45,000 in taxes annually. These savings can then be reinvested in your business or saved for retirement. The compounded savings can go a long way, making it clear why incorporating is an optimal approach.

Another benefit comes into play when you are purchasing a practice (ex. dental practice) through financing. The loan repayment becomes more tax efficient when done through a corporation. As the corporate tax rates are lower, you are left with more after-tax money that can be used to repay the loan more quickly.

Liability in a Corporation

Having a corporation in place provides an added layer of security against personal liability. It makes it more difficult for someone to go after personal assets if the business defaults on its debts. However, it is important to know that professional liability is not limited in any way by practicing within a corporation.

Income Splitting (TOSI)

In 2018, the federal government introduced new rules to deter business owners from splitting income with their family members, and Tax on Split Income (TOSI) was introduced. TOSI taxes the split income the family member receives at the highest tax rate unless an exception applies.

Interest or dividends from a public corporation or mutual fund corporation (investment portfolio) may be split without the application of TOSI. We recommend you discuss this with us before you pay dividends to your family to see if you fall within any exceptions.

Lifetime Capital Gains Exemption (LCGE)

Where your practice can be sold, or the shares of the corporation can be sold, a corporate structure will allow for the use of the lifetime capital gains exemption. This is a common tax plan for retiring professionals who can sell their practice.

The lifetime capital gains exemption allows each individual shareholder who is selling their shares to shelter the first $971,190 (for 2023 – indexed each year) of capital gains from tax. That means the first $971,190 of capital gains will be tax-free.

The lifetime capital gains exemption is available to each taxpayer. This means that on the sale of your practice, the lifetime capital gains exemption may be multiplied by including your spouse, children, and parents as shareholders of the corporation (subject to your college’s by-laws).

To qualify for the lifetime capital gains exemption, the shares of the corporation must be of a Qualified Small Business Corporation (QSBC). Various conditions must be satisfied to meet the qualification. The Small Business Corporation must be carrying on an active business and:

It must be a Canadian company controlled by Canadians (at least 50% Canadian ownership);
it must be a privately owned company (not publicly traded);
at the point in time of disposition of the shares, 90% of the fair market value of the assets of the company must be used by it, or by a company owned by it, in an active business carried on in Canada;
for the 24-month period prior to any sale of the shares, the fair market value of the assets used in the active business of the company must be at least 50% of the total fair market value of the assets; and
where there are holding companies or numerous operating companies, the qualifying assets in each company must meet certain percentage tests for use in an active business.

One thing to watch out for is when your investments portfolio, excess cash, or assets not used in your active business grow beyond the qualifications stated above. When your corporation is in such a position, we have a remedy.

Professional Services through a Partnership

If you offer your professional services through a partnership, you can also hold your partnership interest through your corporation. By holding your partnership interest through a corporation, you are able to defer taxes and possibly get the lifetime capital gains exemption as discussed above. Generally, the rollover of partnership interest into your corporation can be done on a tax deferred basis as well.

Purifying and Creditor Proofing

We may be able to solve the issues mentioned above by “purifying” the professional corporation and moving the inactive assets into a holding company on a tax-deferred basis. This results in the assets to be held by another corporation and not your professional corporation. In addition to bringing your corporation on-side to be able to use your LCGE, this plan also aids with creditor proofing.

If you are interested in learning more about incorporating a professional practice, or how we can optimize your existing corporation, book a consultation with our team.