Tax Rates Are Going Up, But There Is Some Good News!

Tax rates are going up, but there is some good news!

The recent BC Government Budget on February 19, 2013 and the Federal Government Budget on March 21, 2013 weren’t particularly pleasant when it comes to tax rates.  The tax rates for dividends are going up substantially and in BC we will have a new higher tax bracket of 45.8% for individuals who earn more than $150,000 per year.

However, there was also some good news, especially for business owners and owners of farmland.  The Federal Government is proposing to increase the lifetime capital gains deduction in 2014 to $800,000.

This is an increase of $50,000 from the previous lifetime limit of $750,000.

The lifetime capital gains deduction allows an individual to eliminate the tax on the capital gains on 3 types of properties:  (1) qualified small business corporation shares; (2) qualified farm property; and (3) qualified fishing property.

This increase in the lifetime capital gains deduction is extremely valuable.  The tax savings on an $800,000 capital gain are over $183,000.  And every individual who lives in Canada has their own exemption.  So it can provide excellent tax savings for a family owned business or family owned farmland.

For example, if 4 members of a family own a business, those 4 family members have the potential to shelter $3.2 million of gains (4 x $800,000).  That translates into potential tax savings of over $732,000 for the family.

If you are starting a new business, or currently own a business that you expect to increase in value, consider the benefits of family ownership.

Most people use their lifetime capital gains deduction when they sell their business or farm.  But since capital gains tax is also triggered on death, or when shares or land is transferred from one family member to another as a gift, it is also very valuable for estate planning purposes and succession planning for a family owned business.  Intergenerational transfers of farmland are much easier if you can utilize the lifetime capital gains deduction.

The lifetime capital gains deduction was $500,000 in 1994 and increased to $750,000 in 2007. These increases have probably not kept pace with inflation, but are welcome nonetheless.  After 2014, the lifetime limit will be indexed to increase with inflation.

Those people who have already used their $750,000 deduction will want to consider using the remaining $50,000.  That still amounts to over $11,000 in tax savings per person.

Good tax planning is essential to maximize the benefits of this deduction.  It is truly one of the few “gifts” from the Government as this deduction actually eliminates tax (rather than just deferring the tax until later).

Tom Fellhauer heads up the Tax Group at Pushor Mitchell LLP.  You can contact Tom at (250)869-1165, or at [email protected]

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