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Kim G C Moody’s Musings – 1-1-1 Newsletter For December 11, 2024
One Comment About Taxation – What Can We Expect From the Fall Economic Statement?
In about a week, the Canadian House of Commons will recess after its last sitting day on December 17, 2024. It will reconvene on January 27, 2025.
The Fall Economic Statement has only a short time before the end of the year to be delivered. Our illustrious Finance Minister earlier this week that she will deliver a FES on December 16, 2024…one day before the recess. Why the delay? I’m not buying the lame stated excuse that filibusters have been the cause. Instead, I think this is a continuing display of this government’s overall incompetence.
Despite this, I look forward to seeing an update on how bad the federal deficit is and what games have been played to sugar coat our country’s ugly fiscal mess. Put me on record that the estimated deficit will be much larger than earlier predicted.
I’m also hopeful that we won’t see any more “gifts” being handed out. Our country can not afford it. Instead, we need a basket of pro-growth and productivity measures to counter our weak economic performance and what is coming in the U.S. Such measures would include massive and meaningful spending cuts. Unfortunately, we will not see any of those measures in the FES. Instead, we’ll continue to see a display of performative theatre which this government is obsessed with.
And with respect to tax, I hope we will get an update on the status of the capital gains inclusion rate proposal. With a week to introduce a Bill to the House and get it through to Royal Assent, I think it’s fair to say that 2024 will not be the year that this measure gets passed.
Instead, there are a number of options available to the government to deal with the capital gains proposals. The first is that this government will “see the light” and abandon the proposals. That won’t happen. It has vigorously defended such proposals as being necessary for the “rich” to pay more and to deal with intergenerational “fairness”. To abandon this non-sensical messaging now would be too much of an about face for this government.
The second option would be to introduce the proposals in a bill once the House of Commons reconvenes next month. Such a bill would ensure the proposals continue to be retroactively effective to June 25, 2024.
The third option is to delay introducing the bill into the House until the 2025 federal budget is introduced likely sometime in March or April of 2025. The bill would ensure the proposals are retroactively effective to June 25, 2024. This would enable the government time to perfect the draft legislation (which is still imperfect and very complex).
The problem with the second and third options is how affected taxpayers should deal with realized or deemed capital gains in the meantime? Should they report such capital gains as if the proposals apply? The Canada Revenue Agency is encouraging taxpayers to do that because if the proposals become law they will need to administer and collect taxes on that basis. Interest charges could also apply although the CRA has announced they will be offering limited relief to March 3, 2025. But what happens if the proposals never become law? Well, on that basis, taxpayers would need to seek refunds via amended tax returns. Under those alternatives, how can the CRA update its prescribed forms and administer the proposals if it will not become law until likely late spring?
The fourth alternative is for the government to seek an election before the proposals are passed into law. This would make the proposals disappear and a new government would need to re-introduce them into Parliament should they desire.
What a mess!
I was chatting about this mess with a friend of mine last week. He proposed that there might be a fifth alternative for the government to deal with the capital gains proposals. It’s a hybrid of the first three options above. In the FES, the government could announce another “Christmas gift”: the implementation date of the capital gains proposals will be changed from June 25, 2024 to January 1, 2025 as many people had originally been calling for when the proposals were released last April.
If that fifth alternative was “gifted” to Canadians, I can already hear the outcries from many affected Canadians. Such an alternative would be piling onto recent examples that required Canadians and their advisors to engage in complex and costly filings only to be told that they were being delayed (like the bare trust and Underused Housing Tax filing debacles). These were the rebuttals I provided to my friend.
But he reminded me that the “mess” the government is in (given the long delay between the proposed effective date to today…. approaching 6 months!) would be greatly reduced if the fifth alternative was put forward. The CRA would not have to worry about administering the proposed law for 2024 while taxpayers and their advisors would gain immediate clarity. It would also eliminate the need for taxpayers to preemptively amend tax software and file tax returns based on uncertain legislation, saving significant time and effort. The Liberal – NDP voter base would likely be indifferent since they could still hang onto their “fairness” argument.
What’s my guess? Well, I always hesitate being a prognosticator, but I predict a version of the second alternative above will eventually come to fruition.
The economist, Adam Smith wrote, in his seminal writing The Wealth of Nations: “The tax which each individual is bound to pay ought to be certain, and not arbitrary. The moment it becomes arbitrary, government begins to lose the trust of the people.”
The 20th century American businessman Robert Half also stated: “People try to live within their income so they can afford to pay taxes to a government that can’t live within its income.”
Both are very wise quotes for our government to ponder while making its next move to be delivered in the FES. Canadians need to see our tax system being certain and for our government to live within its means. Lofty goals, indeed, for our current government.
One Comment About Leadership – The Importance of Learning From Failures
I’ve written about the importance of learning from failures before in this newsletter. It’s amazing to me, however, that many people that I hang around with get paralyzed about making decisions because of their fear of failure. For most successful leaders I know, they are thoughtful about making decisions but the fear of failure is usually way down the list. That’s because they are thoughtful, understand the risks and have usually experienced failure in some form or fashion and have learned valuable lessons along the way.
I’m not much of a television watcher but over the last few years I got addicted to Yellowstone. I love the script writing. Recently the producer of Yellowstone debuted another series, Landman. It’s about the oil and gas industry and I’m two episodes in. It’s well written and features a veteran “landman” who has experienced much in his life including raising two now young adult kids with his ex-wife. During one scene, the daughter was lamenting to her father about the fact that her relationship with her boyfriend came to an end as predicted by “Dad”.
“How come you’re always right?” the daughter said to her Father.
“Cause I spent all my life being wrong and I never forgot the lessons,” said Dad.
Yep, brilliant line. Leaders spend their entire careers learning lessons from experience and failures. Embrace it.
One Comment About Economics: House Flipping
Canada has long had a “flipping tax”, a ridiculous phrase to describe full taxation on profits realized from the disposition of properties that are not capital property. In other words, if the disposed property was not capital property it would be considered inventory. Dispositions of inventory that result in profits have always been fully taxable. Without getting into the technicalities, “flippers” of real estate are usually disposing of inventory and not capital property. Thus the profits realized from dispositions are always fully taxable.
In the 2021 federal election, the Liberal Party announced, in its election policy platform, that if they were elected they would introduce a “flipping tax” which would make profits from the disposition of any residential property within 365 days of acquisition fully taxable.
Following the election of the Liberals, they followed through on their promise and this ridiculous tax is now enshrined into the Income Tax Act with an effective date of January 1, 2023. There are certain “life exceptions” to the application of the rule. The British Columbia provincial government has also recently introduced an expanded 730 day “flipping tax” as well.
Many tax practitioners, including me, have been very vocal against the new federal provision given the duplicity of the rule. Such duplicity adds unnecessary complexity to the Income Tax Act. Apparently, the Liberals felt this new rule was necessary to deal with “flippers” who were presumably a significant cause of Canada’s housing shortage. Such reasoning is extremely weak and I have challenged the government many times to provide statistics in support of their reasoning.
I’ve always said that flippers are hardly the problem to Canada’s housing challenges. And now, Statistics Canada has shed light on this issue and is providing evidence that flippers are not the problem.
From a Financial Post article about the Statistics Canada report:
Statistics Canada has shed light on the extent of home flipping in British Columbia, and the findings might surprise those who are quick to blame speculators and flippers for Canada’s worsening housing affordability.
It turns out just a little over three per cent of residential properties sold in B.C.in 2021 were owned for less than a year before being resold. Not only is the prevalence of “flipped” sales low, but the economic profits generated by such transactions were negligible, suggesting that flippers are not walking away with exorbitant ill-gotten wealth.
The narrative that real estate investors, particularly those flipping homes, are inflating house prices has gained traction in Canada. This belief has prompted policy responses, including a federal measure effective January 1, 2023, which taxes profits from properties sold within a year as business income. The B.C. government is following suit with a home-flipping tax to be implemented in January 2025.
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Statistics Canada has so far only released data on home flipping in British Columbia, with results from other provinces expected in the future. Even this partial picture suggests Canadians may have been misled about the scale of the issue. Flipping constitutes a small fraction of residential sales, and flippers’ profits — once transaction costs, taxes, and fees are accounted for — are likely modest or non-existent.
Statistics Canada also reported that less than two per cent of B.C. homes sold in 2021 were held for six months or less, suggesting that U.S.-style frequent flipping is even more infrequent in Canada. Urban centres like the Vancouver Census Metropolitan Area (CMA) saw slightly higher activity, with 3.2 per cent of homes resold within a year. Condominiums were the most frequently flipped, at four per cent, compared to 2.8 per cent for single detached houses. The median ownership duration of condos in B.C. is 5.9 years — far shorter than the 13.5-year median for single detached homes.
Despite public perceptions, Statistics Canada’s data does not portray flippers as exploiting the housing market for extraordinary gains. Properties sold within a year of purchase in 2021 had a median acquisition price of $565,000, compared to $610,000 for other transactions, indicating that flippers often target undervalued homes.
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To tame the housing affordability dragon, Canada must build substantially more homes to address its chronic shelter deficit. Flipping is but a minor subplot in the broader narrative of Canada’s housing challenges.
I can’t say I’m surprised by the Statistics Canada findings. It was obvious from the start that the Liberals election policy platform on this issue was flawed and was simple politics pandering to a voter group that believed housing problems were significantly caused by flippers.
Nope.
This is but one more example the current government is not a serious government.
Bonus Comment – Quote From the Famous Inventor Thomas Edison – About Learning From Failures
“I have not failed. I’ve just found 10,000 ways that won’t work.”
Yep, totally agree. Leaders, are finding ways that won’t work?
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