What is a capital gains strip?
A “capital gains strip” is a strategy to extract corporate funds in a manner that is more tax-efficient than the conventional methods of drawing dividends or salaries. In particular, it involves the conversion of amounts that would otherwise be taxed as dividends into capital gains. In the top income tax bracket, depending on the type of dividend, dividends are taxed at approximately 39% or 48% at the personal level, whereas a capital gain is taxed at a much cheaper rate of about 27%.
Is capital gains strip planning still viable?
We recommend that any capital gains strip planning be implemented in 2023 due to looming legislative changes set to take effect on January 1, 2024. While these legislative changes are not yet final, based on the government’s stated intent, it appears that capital gains strip planning will no longer be viable in 2024 and beyond, except perhaps in narrow cases where commercial circumstances present such an opportunity.
What to consider for 2023?
In light of the above, it appears that 2023 will be the “last kick at the can” for capital gains strip planning. That being said, it would be prudent to consider extracting cash from your corporation in excess of your immediate needs, effectively prepaying tax at a lower rate. Given the complexity (and thus professional fees) involved in such a transaction, TZR recommends that consideration only be given to such planning where, depending on your circumstances, $450,000 – $600,000 or more is being extracted.
Contact your TZR advisor as soon as possible if you believe that you may be a candidate for the above type of planning as the end of 2023 is quickly approaching.
The above content is for informational purposes only and is general in nature. It is not intended to be advice. No person or entity should act upon the information above without receiving professional advice after all the facts and circumstances specific to their situation are thoroughly reviewed.