Here are some year-end planning considerations for individuals in light of the increased capital gains inclusion rate.  

Consider future cash flow needs

As described in the example above, if you anticipate needing cash flow in 2025 and plan to meet this need by liquidating investments, which will result in capital gains exceeding $250,000, consider realizing the gains on a portion of your portfolio before year-end. By doing so, you can potentially avoid having some or all of the capital gains taxed at the higher inclusion rate. It is also important to note that spouses both have their own $250,000 exemption from the higher inclusion rate. Therefore, if you are liquidating investments from a joint account that both spouses contributed to equally, only capital gains in excess of $500,000 would be subject to the higher inclusion rate. Working together, your financial advisor and tax professional can help determine the best strategy for meeting your cash flow needs while minimizing taxes.

Review your portfolio and consider harvesting losses

As we approach year-end, it’s also a good time to evaluate your portfolio and decide whether it makes sense to realize any capital losses before Dec. 31. Capital losses are now more valuable when applied against capital gains in excess of $250,000. 

If your capital gains exceed $250,000 from June 25 to Dec. 31 of this year, consider "tax-loss selling" by selling underperforming assets. These losses can be used to offset gains that would otherwise be taxed at the higher inclusion rate. Read more about tax-loss selling in our ATB Wealth Year-end Tax Planning Guide.

Strategically time the use of loss carryforwards

Net capital losses can be carried back three years and forward indefinitely. Prior to the change in inclusion rate, net capital losses realized in a year were often carried back to previous years if possible to recover taxes paid on previously realized capital gains. Now individuals may want to consider whether they will have capital gains taxed at the higher inclusion rate in the future.  

If you have net capital losses in 2024 that can be carried back to a previous year, consider if future capital gains will exceed $250,000 and whether it is more beneficial to maintain the carryforward and apply them to capital gains subject to the higher inclusion rate in a future year. 

A $5,000 capital loss realized at the 50% inclusion rate will offset a $5,000 capital gain realized at the 66.67% inclusion rate. 

Consider the time value of money

When evaluating strategies that involve realizing capital gains early or using a capital loss later, it's important to consider time value of money. Realizing gains and paying tax earlier than necessary means you're parting with cash today, which could otherwise be invested to generate returns. This potential for growth should be weighed against the benefit of locking in a lower tax rate. Conversely, deferring the use of capital losses to future years, when they may offset gains taxed at a higher inclusion rate, could result in greater tax savings. However, the deferral delays the tax relief and must be balanced with the opportunity cost of waiting. In either case, the time value of money plays a critical role in determining whether paying tax sooner or deferring deductions is more advantageous in the long run, highlighting the importance of considering your tax and investment planning together rather than in isolation.

Be prepared for your tax bill and double check instalments

If you chose to realize capital gains before the increase to the inclusion rate, ensure you’re prepared for the tax bill due by April 30, 2025. Additionally, review your 2025 instalment payment requirements with your tax advisor. While CRA’s instalment reminders are based on your previous two years’ tax returns, you can opt to calculate instalments based on your expected 2025 tax liability, which may avoid inflated payments. Your tax advisor can help you use this "current-year option."