How one advisor is helping physician and dentist clients manage cap gains hike

A policy change in the 2024 budget designed to tax the wealthiest Canadians and incentivize the sale of more real estate assets may have upended the retirement plans of a significant group of Canadians. The budget has proposed an increase in the capital gains inclusion rate, from 50 per cent to 66 per cent. For individuals, this higher rate only takes effect after they cross a $250,000 capital gains threshold. For corporations and trusts, however, the 66 per cent inclusion rate begins at dollar number one. That decision has created a major issue for one group of Canadians who use personal corporations as a core part of their long-term financial plans: physicians, dentists, and other incorporated professionals.

Rudy Chung is helping his incorporated clients deal with the ramifications of this tax hike. Chung is a Wealth Advisor at Mindset Wealth of iA Private Wealth, based in Vancouver. He explained how he’s helping his clients manage the implications of this tax increase from both a financial and an emotional standpoint. He offered his own perspective in saying that he thinks that applying this tax on dollar one is unfair to a segment of Canadians who took a risk by opening their own practices or businesses, hiring people, and providing essential services.

“I personally find it’s quite unfair to have that higher taxation rate from dollar one. They didn’t extend that $250,000 personal threshold to incorporated professionals,” Chung says. “They’re almost putting them out as the villain, with the public perception that they make so much money they should pay more tax. But I’ve got plenty of incorporated professionals in my practice who would probably have made just as much working in a salaried position. These professionals are employing people, taking risks, and growing their practices. To single them out with a higher rate from dollar one I think is quite unfair.”

What Chung says he would like to see is the ability to transfer that $250,000 personal allowance over to the personal corporation. But as an advisor he has to work with the world as it is, and he is therefore taking steps to prepare his incorporated clients as best as possible ahead of June 25th, when the new inclusion rate takes effect.

The 10-week window that advisors were given between the announcement of the hike and June 25th was, in Chung’s view, not enough time to comprehensively review and overhaul all the financial plans of the impacted clients. That’s especially the case given the lack of clarity that still persists around some of the government’s decisions here. In that brief period his primary focus has been on clients who might need to trigger capital gains in the near term. He is recommending that those clients trigger their gains before June 25th beyond that, he is waiting for further clarity from government.

Managing the dollars and cents of a change like this is one thing, but when policy changes come that seem like they could derail some clients’ whole financial plans there is a great deal of emotional management that advisors need to do. As incorporated clients call worried that their whole strategy may have just been made worthless, Chung reassures them that even at these higher inclusion rates don’t completely undo the utility of incorporation. Personal corporations remain an incredibly powerful tool for tax deferral and compounding into and through retirement. Moreover, they allow clients to ‘open and close the tap’ on their income whenever needed, meaning that even at a higher inclusion rate they still have a great deal of control over their tax bills. Chung emphasizes those values, while also reiterating that given enough time and planning the financial services industry should find a way to manage this issue well for their clients.

As other advisors work with their incorporated clients, Chung says they should familiarize themselves with other means of tax deferral. Those include corporate class mutual funds which pay return of capital, allowing for the deferral of capital gains. That also includes corporately-owned insurance policies which allows people to deposit funds into their corporate policy. The result, if planned properly, can be the payment of very little tax in the long-term.

As they familiarize themselves with these strategies and the implications of the inclusion rate hike for their clients, Chung also drives home the importance of communication by advisors to help their clients stay on course.

“Communication is imperative. Right now you need to reach out to your incorporated professional clients to find out what their short and long-term plans are,” Chung says. “A key part of that is to manage emotions. Because there has been a lot of negative sentiment and concern about this inclusion rate. But, when you look across the board at your clients, a lot of them will not be grossly impacted at all. It’s a little bit more tax for some people, but it could be a lot of tax if big capital gains need to be triggered this year. Communication is how you can help manage that.”