Let us Equip you for Savings Through

the Capital Gains Surplus Strip

Dear Clients and Friends,

On April 7, 2022, the Canadian Government introduced the 2022 Federal Budget. The budget allowed for capital gains inclusion rates and certain existing tax planning strategies to remain in effect. Despite this advantage, there is considerable concern amongst the tax community and academics that this type of planning will no longer be available, or may become less advantageous, in the near future.

One of the strategies that may no longer be available is the Capital Gains Surplus Strip (CGSS). The CGSS allows business owners to distribute earnings from their corporation as a capital gain instead of pulling the cash out as dividends, which are taxed at a higher rate. Instead of the taxpayer pulling out the excess funds as a salary or dividend, which could be taxed at the highest marginal tax rate (close to 54%), it is withdrawn as a capital gain, in which is only taxed at 26.76% (at highest bracket). This substantially reduces the tax burden on this distribution. On every $1M of funds extracted, the tax savings would amount to approximately $210K. The taxpayer can then use these savings to pay off their personal mortgage, invest for their retirement, put a down payment on an investment property, or just for spending.

How does it work?

Through a series of transactions, the share capital of the corporation is amended and a new corporation is created. The proceeds generated as a result of these transactions represent income that is subject to a lower tax rate.

Overall, this process, if done properly by experienced tax professionals, can result in significant tax savings. The government has communicated that they will be looking further into this type of planning within the short-term and may decide to close off this strategy or seek to increase the capital gains inclusion rate to more than 50%, which would make this process less beneficial.

Please do not hesitate to contact us at info@clearhouse.ca or (647) 969 7382 if you have any questions.

Kindest Regards,

Your Clearhouse LLP Team