New tax rates mean 'a lot of employees will have to review their insurance needs'
Budget 2024 announced an increase in the capital gains inclusion rate that took effect on June 25.
The increase is from one-half to two-thirds for corporations and trusts, and from one-half to two-thirds on the portion of capital gains realized in the year that exceed $250,000 for individuals.
These apply to capital gains realized on or after June 25, 2024.
“If you bought a cottage, and you decide to sell [past June 25], the capital gains tax that you're going to pay is generally going to be higher,” says Michael Aziz, chief distribution officer, Canada Protection Plan, in talking with Canadian HR Reporter.
“If you're a business owner and you have a business that you started 25 years ago, and you intend on selling it… for a capital gain, the taxes you're going to pay are going to be higher.”
This could spell trouble for workers who own cottages that they intend to pass on to the next generation, he says.
If a worker buys a cottage at $100,000 and then – years later – decides to sell it for $500,000, “the capital gains that's going to have to be paid on the $400,000, the inclusion rate of 50 per cent, is $200,000.”
Many Canadians (22%) currently have no savings at all, according to a previous report.
How life insurance can help
One solution to the problem is life insurance, says Aziz.
“If I want to make sure that cottage goes to the next generation – my kids… I can buy life insurance with the goal of paying the tax on the property, so that the property can go to the next generation,” he says, because there is tax that’s going to be paid on the property.
And if your kids don't have money to pay the tax bill, “You may have to sell that cottage to pay the tax… I don't want that to happen. I want the cottage to go to the next generation.”
However, workers should also be mindful of the increasing tax rates’ effect on their life insurance coverage, he says.
“It means a lot of business owners, a lot of clients, a lot of employees will have to review their insurance needs”, and make sure they have “enough insurance to make sure that I can pass on that asset,” says Aziz.
“And I think it's very important. I think this capital gains inclusion rate increase is now getting people to think about it.”
Many employers currently have benefit plans for their employees which amount to one to three times their salaries “to cover those short-term needs if something were to happen to them,” he says.
“I think that's fantastic.”
Employers should be mindful of how much they are putting into their group benefits plans for employees for 2024, according to insurance advisors.
Financial advice for employees
However, Aziz still recommends that employers encourage workers to seek help from a financial advisor “to make sure that they have a proper financial plan”.
As it is, a lot of people believe that the insurance coverage they have from their employer is going to be enough.
“I'm not sure that's always the case,” he says. “It's important to have your portfolio reviewed.”
For additional insurance, sometimes an employer benefit plan offers the option to buy increased coverage, Aziz says.
“If not, you may want to go through a financial advisor. But it's important to understand the difference between a term policy often offered by your employee benefit plan, and a permanent plan, which will help manage your estate.”
More than eight in 10 (82 per cent) Canadian workers who have opted into their employer health benefits are worried about their finances being impacted by a critical illness or major injury to themselves or a family member, according to a previous report.
