One Comment About Taxation – Promises Aren’t Paycheques — And Paper Gains Aren’t Income

 

Let’s pretend your boss promises you a big raise and a bonus. The catch? You won’t actually receive either for another 24 months.

 

Now imagine the government taxes you on that promise today.

 

Say the raise and bonus will eventually total $50,000. Even though you won’t see a dollar of it until two years from now, you must report the full amount on your current tax return. At an assumed 30% tax rate, that means paying $15,000 out of pocket well before you ever receive the money. And what happens if your employer reneges on the promise? Shouldn’t you get your tax back?

 

Sounds absurd? It is.

 

Modern income tax systems are built on a basic premise: you are taxed when you realize an economic gain – not when someone predicts you might receive one. Income must be measurable. It must be real. And it must be liquid – or at least presumed to be. The Haig-Simons theory of income would tax annual changes in net worth, but most countries sensibly favor realization to preserve liquidity, certainty and stability.

 

There are obvious exceptions to these goal posts – such as various taxation regimes on death and “exit tax” regimes when people are no longer subject to the taxing regime of a country because of loss of residency (or in the U.S., renouncing one’s citizenship). Wealth tax regimes – which are rare around the world – are another exception and despite many left leaning people advocating for wealth taxes to solve many problems of society, they are very ineffective because of their non-adherence to the basic pillars.

 

In addition, many countries have “deemed income” inclusions for certain types of income to prevent targeted abuse or avoidance. For example, New Zealand, through its “foreign investment fund” rules and Canada, through its foreign investment entity and foreign accrual property income rules, impute annual income for certain types of foreign investments held by residents. Most countries have similar anti-avoidance rules that target otherwise available tax deferral.

 

Beyond the above exceptions, when tax proposals are put forward that challenge the basic pillars, eyebrows are raised. The Netherlands just introduced such a proposal. Last Thursday, the Dutch House of Representatives voted to pass a proposal that, simplified, will tax Dutch residents at 36% on actual investment returns, including unrealized gains on stocks, bonds and cryptocurrencies. Certain types of assets such as real estate and “qualifying” start-ups will follow the normally accepted model around the world whereby tax is only imposed when such assets are disposed of. The proposal still needs to pass the Dutch Senate but if it does it will be effective January 1, 2028.

 

In a simple example, if a Dutch resident owns, say, Apple stock and it has increased in value by €50,000 over the year but the resident still holds the stock in his portfolio, the Dutch tax authority will treat that amount as taxable income and impose a 36% tax (subject to some minor adjustments). And what about future losses (analogous to the above example where the employer reneges on paying the promised amounts)? Can they be carried back to the years where there were gains to recover taxes paid? It doesn’t appear so. Losses will be carried forward, not back. Ouch.

 

The Dutch proposal appears to be a replacement for a system that used to impute income – using a fictitious / assumed rate of return – on savings and investments held by residents that ignored actual returns. However, the Dutch Supreme Court found that system was unconstitutional.

 

If the new Dutch proposal sounds familiar, it is. Many left leaning policy makers have suggested taxing unrealized gains for years. U.S Presidential candidate Kamala Harris proposed something similar during the 2024 campaign for ultra-wealthy people. It was rightly and widely criticized. Like the California ballot initiative to tax billionaires, these types of proposals are problematic given the mismatch between an economic event and the imposition of the tax.

 

That said, when an investor monetizes appreciated stock through structured borrowing or securitization that converts unrealized gains into usable cash, there is a legitimate argument that the tax system should respond. Once liquidity is extracted, the realization principle is functionally met.

 

The Dutch proposals will cause obvious liquidity problems. With capital being mobile, many residents will explore ways to avoid such an unfair tax. It also has all the hallmarks of significant capital flight occurring from The Netherlands should the proposal pass.

 

And what about the Dutch people who cannot leave or have minimal capital – the so-called middle class? Will they be punished? Yes, because they are trapped within a system that punishes capital accumulation.

 

Will such a system ever be adopted by Canada? Well, never say never. With Canada’s finances being in tough shape, a day of reckoning will eventually come. Huge government spending with out-of-control deficits will need to be paid for.  Additional taxes will be an inevitable result.

 

This debate comes back to the simple example at the beginning. Taxing a promised raise before it is paid feels absurd because you haven’t received the money. It may never materialize. Yet the tax is due anyway.

 

Income tax systems have long recognized this distinction. We tax salaries when paid, capital gains when realized, and investment income when received. That discipline prevents volatility, valuation disputes and forced sales just to cover a tax bill.

 

The Dutch proposal crosses a much broader line. If enacted, the Netherlands would become one of the first major economies to broadly impose annual taxation on unrealized gains for ordinary investors. The world will be watching.

Canada should watch with caution. Our fiscal pressures are real, but drifting toward politically fashionable experiments that abandon realization-based taxation would inject instability into an already complex system.

 

Promises are not Paycheques. And paper gains are not income.

 

As the renowned economist  Adam Smith observed over 200 years ago, “The tax which each individual is  bound to pay ought to be certain, and not arbitrary.” Realization-based  taxation respects that principle. Unrealized taxation does not.

 

One Comment About Leadership – In Tragedy, Leadership Rises Above Partisanship

 

The recent tragedy in Tumbler Ridge, BC was heartbreaking. My heart continues to grieve for the families who experienced such a senseless loss. Of course, I will continue to pray for them. I hope you do too.    In the aftermath of the tragedy, something important happened. Canada’s political leaders – across party lines – came together in the Tumbler Ridge community. They stood side by side and even held hands. They expressed sympathy that was genuine. They were able to put partisan politics aside, even if only temporarily.   In the leaders’ speeches at the community gathering, there was no remarks about policy. Or politics. There was no finger pointing. Their speeches were heartfelt, powerful and human.   Yes, I’m sure there are some who want to debate which political leader delivered the “better” speech. That would be foolish. In moments like that, this is not a competition. It’s not a debate stage. It’s not a campaign rally. Frankly, all of the leaders’ speeches were amazingly heartfelt.   In moments of tragedy, real leaders understand something deeper: there is a time to compete – and a time to unite. In crisis, tone matters more than ideology.   When communities are grieving, people don’t want clever arguments. They want empathy. They want steadiness.   The response to Tumbler Ridge was a reminder that beneath the noise of daily politics, there are still leaders capable of rising above it. That’s worth recognizing.   In business and in life, the same principle applies.   When a team member suffers a loss, when a company faces a crisis, or when something deeply human happens – the leader’s job is not to win the room. It’s to steady it and be wholly present.   And sometimes the most powerful message a leader can send is this:   “We’re together in this.” That’s genuine leadership.   As an aside, Conservative Leader, Pierre Poilievre, read a poem at the end of his speech.  The poem is widely attributed to poet David Romano. I had never heard it before and it was powerful. The text of this beautiful poem, “If Tomorrow Starts Without Me”, is below (which is slightly different than the version read at the Tumbler Ridge gathering):   When tomorrow starts without me and I’m not here to see, if the sun should rise and find your eyes all filled with tears for me; I wish so much you wouldn’t cry the way you did today, while thinking of the many things we didn’t get to say. I know how much you love me as much as I love you, and each time that you think of me, I know you’ll miss me too. But when tomorrow starts without me, please try to understand, that an angel came and called my name and took me by the hand, and said my place was ready in heaven far above and that I’d have to leave behind all those I dearly love. But as I turned to walk away, a tear fell from my eye for all my life I’d always thought I didn’t want to die. I had so much to live for, so much yet left to do, it seemed almost impossible that I was leaving you. I thought of all the yesterdays, the good ones and the bad, I thought of all the love we shared and all the fun we had. If I could relive yesterday, just even for a while, I’d say good-bye and kiss you and maybe see you smile. But then I fully realized that this could never be, for emptiness and memories would take the place of me. And when I thought of worldly things I might miss come tomorrow, I thought of you, and when I did my heart was filled with sorrow. But when I walked through heaven’s gates I felt so much at home, for God looked down, smiled at me and told me “Welcome home.” So when tomorrow starts without me don’t think we’re far apart, for every time you think of me I’m right here, in your heart.

 

One Comment About Economics  – Improved Financial Literacy is Not Optional

 

This past week, I released Version 2 of my book, Making Life Less Taxing. Originally published in March 2020, the purpose was never to write a tax textbook or a “how-to” guide. Instead, it was to open Canadians’ eyes to why they should pay attention to their overall tax affairs.

 

Roughly half the book focused on that awareness. The other half addressed how Canada can do better on tax policy and offered practical suggestions for improvement. It was written in a blunt, plain English style filled with real-world stories to make difficult concepts accessible. In other words, it was meant to be a short, breezy read – not a technical slog.

 

Version 2 retains the original premise and style but updates the content for recent tax and political changes. More importantly, it places a much greater emphasis on the urgent need for Canadians to improve their overall financial literacy – of which taxation is a significant part.

 

Why?

 

Because if you understand your financial situation better, you will make better life decisions. Full stop.

 

Take something very current: mortgage renewals. Hundreds of thousands of Canadians are renewing mortgages at significantly higher rates than they had five years ago. Do you understand all your options? Fixed versus variable? Short-term versus long-term? Refinancing? Prepayment penalties? The tax implications if it’s a rental property? Most don’t.

 

But why wouldn’t you get expert advice before making one of the largest financial decisions of your life?

 

Same with retirement savings. Many Canadians rely on self-directed platforms or generic advice found online. While those tools can be helpful, they are not a substitute for thoughtful planning tailored to your circumstances. Asset allocation, tax efficiency, withdrawal strategies, timing of CPP and OAS – these decisions have long-term consequences. An expert can help you avoid costly mistakes.

 

And the same principle applies to taxation. When people don’t understand marginal tax rates, government deficits, capital gains taxation, or how inflation erodes purchasing power, they are vulnerable – financially and politically.

 

Improved financial literacy doesn’t mean you must become an expert. It means you understand enough to ask better questions and to know when to seek expert advice.

 

It also means you’ll make better decisions at the ballot box – instead of voting for someone because they sound good in a 30-second clip or promise benefits without explaining how they’re paid for. Or they might look good.

 

In my view, the overall financial literacy of the average Canadian is alarmingly low. And that lack of knowledge has consequences.

 

Many resist improving their knowledge because it seems boring or complicated. There’s some truth to that. But for those willing to accept the challenge and intentionally increase their understanding, the rewards far exceed the effort.

 

That’s the premise behind Making Life Less Taxing – Version 2: not to turn readers into tax technicians, but to give them enough knowledge to stop being passive about their financial lives.

 

If you feel compelled to pick up a copy, you can do so at the links below.

 

In the meantime, here’s to improved tax and financial literacy in Canada. We need it now more than ever!

 

Amazon Books: https://www.amazon.ca/Making-Life-Less-Taxing-Attention/dp/B0GGTNMV2Q/ref=sr_1_1?

Apple Books: https://books.apple.com/ca/book/making-life-less-taking-version-2/id6758958890

 

Bonus Comment – Paraphrased Idea From Peter Drucker – The Father of Modern Management – About Leaders Needing to Create Community

 

“The ultimate test of leadership is the ability to create a human community.”

 

Exactly. Leaders, do you have the skills to bring humans together to create community?

 

Hope you enjoyed this edition of 1-1-1. If you’re not already part of the In the Mood Network, now’s the time. Please sign-up today.  Whether it’s through consulting, coaching, speaking, or writing, my work is about planting acorns: deliberate, principled actions that challenge the status quo and grow into something far bigger. The goal? Bold reform. Stronger foundations. And a country that values hard work and common sense.