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  • Writer's pictureGagan Sivia

MITIGATION STRATEGIES FOR UPCOMING TAX RULE CHANGES



WHAT CAN BE DONE?

What you need to know: Selling the capital gain eligible asset now


The federal budget released that capital gains exclusion rates are changing from half to two-thirds as of June 25, 2024. This has consequences well beyond what is being discussed. The following article is under the assumption that you are holding your asset within a corporation. If you are holding personally and considering moving to a corporation, various other considerations need to be thought through, but it still may make financial sense to do so.


Overall; take Immediate action – if you were already considering selling your passive investment asset, there is no better time than now. If you can dispose of a capital gains eligible asset before the June 25th deadline, then you would be eligible to maintain the 50% inclusionary rate (16.7% differential). What does this mean? Sell, sell, sell – if it can close and complete before the deadline.  There won’t be any changes based on the new rules and you will be able to become liquid.


If you don’t and wait after the June 25th deadline – be aware of the additional taxes that you would be required to pay vs discounting the sale price to become liquid before the deadline date. The tax-free portion of a capital gain allows for the benefit of the capital dividend, which now will likely be reduced to 1/3rd. This will reduce the amount of tax-free capital dividend that can be transferred to the shareholder from what was available previously. Even with a refundable portion of the taxes if a taxable dividend is declared and paid, the net result is still less after-tax dollars. The math ends up being about 10% more taxes paid under the new legislative changes.


If you can convert your land holdings into development projects, now is the best time to make that change. Welcome to real estate development! 


Contact us at info@azureproperties.group to find out how.


 

PASSIVE REAL ESTATE STRATEGIES

SELL BEFORE JUNE 25, 2024

If you were already planning on selling your Passive Real Estate Holdings that is eligible for capital gains that would be affected by the additional tax… I recommend you strongly consider selling that investment prior to June 25th. Review any and all trusts you may have within your portfolio – if any are close to the 21 year mark – make sure to review any potential consequences that may affect your holdings.


Various reasons exist for being on the sidelines:

  • The investment will make more by holding it beyond June 25th. 

  • You don’t believe your assets can be off-loaded on time.

  • Uncertainty and confusion; I’m not a developer.


Calculate the math to determine if selling to ensure completion prior to the new rule is going to result in more after-tax dollars than waiting.


 

REINVEST WITHIN ACTIVE BUSINESS INCOME PROJECTS

Consider if your investment is resulting in active business income rather than capital gains. There are different tax implications, factors, and calculations with active businesses, which are very beneficial to retain your hard-earned dollars.


Unlike Passive investments, active businesses are eligible for the small business deduction which gets taxed at a reduced amount to a certain lifetime valuation. The benefit is a tax deferral strategy that results in more dollars to invest and reinvest while the funds live within the corporation. Your income will benefit from the small business deduction which allows for a reduction in tax rates to certain limits (see below for more info). You can speak to your accountant for more details, but the advantages can make all the difference and allow you with more profit and more dollars within your corporation under your control.


 

PIVOT YOUR LAND TO DEVELOPMENT

If your passive land holding is eligible for development, consider working with a development partner to guide you through the development process to create the new densities that your land should render.


By moving towards adding housing units to help remedy our housing crisis your land can likely benefit from greater profits from densifying your land.


If your land value is lower than what you anticipated, this is actually a great time to change it from a passive investment that would likely be capital gains eligible to active business – talk to your accountant and other professionals to discuss your specifics details. You may want to consider crystalizing your gain on your holdings by ensuring that appropriate appraisals are in place so the land when it becomes a development parcel rather than a holding parcel is secured.


Development of lands usually renders in increased density and overall increased value, which results in greater profit and greater after-tax dollars to the corporation. Contact us at info@azureproperties.group to discover the benefits of developing your property.


 

RENTAL INCOME REDUCES SBD LIMITS

PASSIVE INCOME REDUCES THE SMALL BUSINESS DEDUCTION (SBD) LIMITS

The maximum allowable business limit for a corporation that is not associated with any other corporation is $500,000. The major benefit of the SBD is the reduced tax rate that is within the SBD limit for your corporation which can be as low as 9% Federally and an additional 2% in BC = 11% tax (much better than any other tax bracket).   


Note the corporation needs to be a Canadian controlled private corporation (CCPC) which means that it is privately held, incorporated in Canada and is controlled by a Canadian resident.


The corporation’s income must be deemed to be from Active Business and this limit will be reduced by any passive income almost at a reduction of $5 for each $1 of passive income exceeding $50,000. It is important to ensure that the eligible income can be proven to be active business and the amounts within the bounds of a small business deduction (SBD) will benefit from the reduced taxation rates.


I.e.. If the corporation earns $500,000 in active business income and $75,000 in rental income* the SBD will be reduced by $125,000 and now you can only benefit from $375,000 of the active business income at the lower rate rather than the full $500,000.


*Rental income is considered as passive and taxed at the highest tax bracket


 

WORKING THROUGH THE MATH

PASSIVE INVESTMENTS AS CAPITAL GAINS INCOME VS ACTIVE BUSINESS INCOME HELD WITHIN A CORPORATION



As with all investment advice, contact your trusted financial and legal professionals. Overall, there are a variety of concerns with the new capital gain measures being introduced – the concern is how we can work together to mitigate concerns. At Azure Properties Group, we will review your lands’ potential and feasibility. The landowner and development community can work together on adding more housing units to BC’s housing stock and it begins with protecting your investment.


There are various forms of investments within this realm; those that render Capital Gains income (which is now resulting in a major increase in taxes payable), those that focus on passive income (which is taxed at high rates with no protection from the SBD rates), and those that are classified under active business income (which actually creates a value-difference in the land, adding/ improving existing housing stock and likely improving anticipated profitability).


For those that are willing to move forward on their land, we can help. Contact us at info@azureproperties.group to find out how.


 

DEMONSTRATING ACTIVE ASSETS

ENSURE THE ASSET CAN BE CONSIDERED AS ACTIVE ASSETS

Overall, if the goal of your land (especially now) is to proceed with development (at some point) then your land(s) could fall into the active business classification. The goal would be to continuously work towards the success of the development which could mean various benefits based on what yields your land can result.


This can be challenging, but you are not alone. Azure Properties Group does offer various development services and partnerships that can be formed to ensure goals are met and overall success is achieved, while achieving the highest return on your land investment.


Generally, an asset is used principally (i.e., more than 50%) in an active business if its primary or main use is in that business. Whether a particular asset is used principally in an active business is a question of fact; which must be determined with reference to the circumstances of the case under review. The relevant circumstances include; the actual use to which the asset is put during the business, and the nature of the business and the practice in the industry.



 

ADVICE AND NEXT STEPS

CONTACT YOUR TRUSTED ADVISORS BEFORE ACTING ON THIS ARTICLE AND ADVICE

As with all advice and shared wisdom, ensure that all concepts are reviewed by other professionals who understand your specific situation and the rules of the day. The concerns today can change before this newsletter is read. We are passionate of the success for all of us in this dynamic real estate industry and appreciate this brother/sisterhood we are all apart of with all the hurdles, struggles and changes faced within this industry. With all pieces of financial and advice nature – excuse any errors and typos – this is meant for conversation and discovery. Seek the appropriate advice from your trusted professionals and not just an article written out of passion!


This article may not be used against the author or Azure Properties Group.


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