Investors in North America face a significant shift in tax policy that could dramatically increase the cost of realizing investment gains. Both the United States and Canada have announced proposals that raise capital‑gains and dividend taxes for high‑income earners, prompting many to reassess residency and exit‑strategy planning.
United States – Biden administration proposals
- Ordinary income tax: A return to a top marginal rate of 39.6 % on wages and other earned income, matching the rate used during the Clinton era.
- Capital‑gains and dividend tax:
- For individuals with more than $1 million in long‑term capital gains or qualified dividends, the rate could rise to up to 37 %.
- The combined top rate for investors—ordinary income plus the capital‑gains component—could reach 44.6 %.
- Additional “SE” surcharge: A 1.2 % surcharge on short‑term capital gains for taxpayers whose investment income exceeds $400,000. This could be increased in future legislative iterations.
- Scope: The changes target high‑income investors, including those cashing out large crypto positions, stock sales, or business exits.
Implications
- The effective tax burden on investment income for the wealthiest could approach half of the total proceeds.
- U.S. citizens remain subject to tax on worldwide income, even after relocating abroad, although foreign‑earned‑income exclusions apply only to earned (not investment) income.
Canada – Trudeau government proposal
- Current inclusion rate: 50 % of a capital gain is included in taxable income.
- Proposed inclusion rate: 66.6 % for individuals with annual income above CAD 250,000 (some references cite CAD 400,000).
- Effect on a CAD 50,000 gain:
- Under the current system, CAD 25,000 is taxable.
- Under the proposal, CAD 33,300 is taxable, meaning an additional CAD 8,300 is subject to the taxpayer’s marginal rate.
- Secondary residences: Gains on the sale of cottages or other non‑primary homes would be fully subject to the higher inclusion rate.
- Population impact: The measure is projected to affect roughly 0.13 % of Canadians (the top wealth bracket) and about 12 % of corporations, with an average affected income of CAD 1.42 million.
Strategies for high‑net‑worth investors
| Goal | Typical approach | Key considerations |
|---|---|---|
| Reduce U.S. tax exposure | Relocate to a U.S. tax‑friendly jurisdiction (e.g., Puerto Rico) or renounce U.S. citizenship. | Puerto Rico offers a “ bona‑fide resident” regime with reduced capital‑gains rates, but eligibility requires meeting residency tests. Renunciation triggers an exit tax based on worldwide assets. |
| Mitigate Canadian capital‑gains impact | Establish non‑resident status before the law takes effect; move assets to jurisdictions without capital‑gains tax. | Canada imposes a departure tax on deemed disposition of worldwide assets at fair market value, unless assets are transferred to a qualifying corporation or held in a tax‑deferred plan. |
| Timing of asset sales | Realize gains before the higher rates become law, or when asset values are relatively low. | Delaying sales may increase both the tax rate and the asset’s market value, compounding the tax bill. |
| Use of tax‑efficient investments | Allocate to jurisdictions with no capital‑gains tax (e.g., Singapore) or to U.S. tax‑advantaged accounts (IRAs, 401(k)s). | U.S. citizens are taxed on worldwide income regardless of account location; foreign tax credits may offset some liability. |
| Diversify residency | Obtain a second passport or residency in a low‑tax country (e.g., Malta, Malaysia) to facilitate future relocation. | Dual citizenship does not automatically exempt U.S. citizens from U.S. tax; careful planning is required to avoid unintended exposure. |
Practical steps
- Assess current exposure – Calculate the proportion of income derived from wages versus investment returns, and identify whether you exceed the $400 k (U.S.) or CAD 250 k (Canada) thresholds.
- Model tax scenarios – Project tax liabilities under existing rates versus the proposed rates for both ordinary and capital‑gain income.
- Explore residency options – Research jurisdictions that offer favorable tax treatment for capital gains and evaluate the residency requirements (physical presence, economic ties, etc.).
- Plan asset disposition – If a sale is imminent, consider executing it before the new legislation becomes effective, or structure the transaction (e.g., installment sales) to spread tax liability.
- Consult exit‑tax rules – For U.S. citizens, understand the “exit tax” triggered by renunciation; for Canadians, review the deemed‑disposition rules that apply upon becoming a non‑resident.
Outlook
Both proposals reflect a broader political trend of targeting high‑income earners for increased revenue. While the measures primarily affect the wealthiest investors, the ripple effects could influence capital‑allocation decisions across the market. Early planning—particularly regarding residency, timing of asset sales, and the use of tax‑efficient structures—will be essential to mitigate the financial impact of these upcoming tax changes.
